A loan shark is a person or body that offers unsecured loans at high interest rates to individuals, often backed by blackmail or threats of violence.
Throughout history, usury laws made loan sharks commonplace. Many moneylenders skirted between legal and extra-legal activity. In the recent western world, loan sharks have been a feature of the criminal underworld, but are otherwise rare. Loan sharks are common in the UK and among the Italian Cosa Nostra and Triads in China.
History
The phrase "loan shark" came into usage in the United States late in the nineteenth century to describe a certain type of predatory lender. The lenders to whom these epithets were applied charged high rates of interest and designed their credit products in such a way as to make orderly retirement of the debt difficult. Borrowers became trapped by their loans and were unable to pay off the principal. The interest payments dragged on and many borrowers became virtual debt peons. As Cobleigh explains, "The real aim of loan sharks is to keep their customers eternally in debt so that interest (for the sharks) becomes almost an annuity."
Today loansharking tends to be associated in the popular mind with organized crime. The stereotypical loan shark is often thought to be a gangster who extorts repayment of the debt with threats of physical brutality. Such loan sharks do exist, but the first loan sharks were not linked to crime families and they did not beat up delinquent debtors. The phrase was originally applied to salary and chattel mortgage lenders who operated at the turn of the twentieth century. These creditors dealt in small sums (most loans were less than $100) and they charged high rates of interest (between 10% and 20% a month, and sometimes more). Many of these cash advances were interest-only and required a lump-sum payment to retire the principal. As a result, loans that were supposed to be short term often dragged on for months and years. To pay one lender, the debtor often took out another loan in a process that was called "pyramiding." The loan sharks frequently colluded in encouraging this expanding chain of debt.
To compel repayment, the first loan sharks secured their cash advances with chattel mortgages or wage assignments. A chattel mortgage entitled the lender to repossess household goods in case of default. A wage assignment gave the lender an enforceable claim on the debtor’s next wage payment. Because many employers at that time made it a policy to discharge employees against whom a wage assignment was filed, this instrument of security was especially effective in coercing debtors to keep making their payments.
Loan sharks tended to proliferate in big cities where there were large numbers of wage workers with regular paydays but modest salaries. These lenders operated out of cheap storefront offices and catered especially to government employees, factory hands, and office clerks. In the early decades of the twentieth century, it was estimated that one in five urban households in the United States borrowed from the loan sharks.
Newspapers after the turn of the century were filled with stories about the plight of debtors who were being mauled by the loan sharks. Before the First World War, a progressive coalition emerged to fight on behalf of these consumers. This fight culminated in the drafting of the Uniform Small Loan Law, which brought into existence a new class of licensed lender. The model statute mandated consumer protections and capped the interest rate on loans of $300 or less at 3.5% a month or the equivalent of 42% a year. Its aim was to establish a reputable class of lenders that could satisfy the demand of loan shark victims at a substantially reduced rate. The law was enacted, first in several states in 1917, and was adopted by all but a handful of states by the middle of the twentieth century.
Mafia links
Although the reform law was intended to starve the loan sharks into extinction, this species of predatory lender survived and evolved. After high-rate salary lending was outlawed, some bootleg vendors recast the product as "salary buying." They claimed they were not making loans but were purchasing future wages at a discount. This form of loansharking proliferated through the 1920s and into the 1930s until a new draft of the Uniform Small Loan Law closed the loophole through which the salary buyers had slipped. Salary-buying loan sharks continued to operate in some southern states after World War Two because the usury rate was set so low that licensed personal finance companies could not do business there.
Organized crime began to enter the cash advance business in the 1930s, after high-rate lending was criminalized by the Uniform Small Loan Law. The first reports of mob loansharking surfaced in New York City in 1935, and for 15 years, underworld money lending was apparently restricted to that city. There is no record of syndicate "juice" operations in Chicago, for instance until the 1950s. In the beginning, underworld loansharking was a small loan business, catering to the same populations served by the salary lenders and buyers. Those who turned to the bootleg lenders could not get credit at the licensed companies because their incomes were too low or they were deemed poor risks. The firms operating within the usury cap turned away roughly half of all applicants and tended to make larger loans to married men with steady jobs and decent incomes. Those who could not get a legal loan at 36% or 42% a year could secure a cash advance from a mobster at the going rate of 10% or 20% a week for small loans. Since the mob loans were not usually secured with legal instruments, debtors pledged their bodies as collateral.
In its early phase, a large fraction of mob loansharking consisted of payday lending. Many of the customers were office clerks and factory hands. The loan fund for these operations came from the proceeds of the numbers racket and was distributed by the top bosses to the lower echelon loan sharks at the rate of 1% or 2% a week. The 1952 B-flick "Loan Shark," starring George Raft, offers a glimpse of mob payday lending. The waterfront in Brooklyn was another site of extensive underworld payday advance operations around mid-century.
Over time, mob loan sharks moved away from such labor intensive rackets. By the 1960s, the preferred clientele was small and medium sized businesses. Business customers had the advantage of possessing assets that could be seized in case of default, or used to engage in fraud or to launder money. Gamblers were another lucrative market, as were other criminals who needed financing for their operations. By the 1970s, mob salary lending operations seem to have withered away in the United States.
At its height in the 1960s, underworld loansharking was estimated to be the second most lucrative franchise of organized crime in the United States after illegal gambling. Newspapers in the 1960s were filled with sensational stories of debtors beaten, harassed, and sometimes murdered by mob loan sharks. Yet careful studies of the business have raised doubts about the frequency with which violence was employed in practice. Relations between creditor and debtor could be amicable, even when the "vig" or "juice" was exorbitant, because each needed the other. FBI agents in one city interviewed 115 customers of a mob loan business but turned up only one debtor who had been threatened. None had been beaten.
Organized crime has never had a monopoly on black market lending. Plenty of vest-pocket lenders operated outside the jurisdiction of organized crime, charging usurious rates of interest for cash advances. These informal networks of credit rarely came to the attention of the authorities but flourished in populations not served by licensed lenders. Even today, after the rise of corporate payday lending in the United States, unlicensed loan sharks continue to operate in immigrant enclaves and low-income neighborhoods. They lend money to people who work in the informal sector or who are deemed to be too risky even by the check-cashing creditors. Some beat delinquents while others seize assets instead. Their rates run from 10%-20% a week, just like the mob loan sharks of yesteryear.
UK loan sharks
The research by the government and other agencies estimates that 165,000 to 200,000 people are indebted to loan sharks in the United Kingdom. Loan sharking is treated as a high-level crime by law enforcement, due to its links to organized crime and the serious violence involved.
Non-Standard Lenders in the United States
In the United States, there are lenders licensed to serve borrowers who cannot qualify for standard loans from mainstream sources. These smaller, non-standard lenders often operate in cash, whereas mainstream lenders increasingly operate only electronically and will not serve borrowers who do not have bank accounts. Terms such as sub-prime lending, "non-standard consumer credit", and Payday loans are often used in connection with this type of consumer finance. The availability of these products has made illegal, exploitative loan sharks rarer, but these legal lenders have also been accused of behaving in an exploitative manner. For example, payday loan operations have come under fire for charging inflated "service charges" for their services of cashing a "payday advance", effectively a short-term (no more than one or two weeks) loan for which charges may run 3-5% of the principal amount. By claiming to be charging for the 'service' of cashing a paycheck, instead of merely charging interest for a short-term loan, laws which strictly regulate moneylending costs can be effect
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