vernacularism

Loan shark

A loan shark is a person or body that offers illegal unsecured loans at high interest rates to individuals, often backed by blackmail or threats of violence. They provide credit to those who are unwilling or unable to obtain it from more respectable sources, usually because interest rates commensurate with the perceived risk are illegal.

In much of history, usury laws made loan sharks commonplace. Many moneylenders skirted between legal and extra-legal activity. In the western world in recent years, loan sharks have been a feature of the criminal underworld, but otherwise rare. Loan sharks are common in the Italian Cosa Nostra and Triads in China.

There are many registered and legal lenders that lend to people who cannot get loans from the most mainstream lenders such as large banks. They often operate in cash, whereas mainstream lenders increasingly operate only electronically, which means that they will not deal with people who do not have a bank account. Terms such as subprime lending and "non-standard consumer credit" are used for this type of lender. Payday loans are one example of this type of consumer finance. The availability of these products has made true loan sharks rarer, though some legal lenders have been accused of behaving in an exploitative manner.

Payday loan operations have also come under fire for charging inflated "service charges" for the service 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 effectively bypassed.

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. Earlier variations of this vernacularism include "land shark" and "money shark." 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.

The First Loan Sharks

Today loansharking tends to be associated in the popular mind with organized crime. The stereotypical loan shark is 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 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 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 first enacted in several states in 1917 and was adopted by all but a handful by the middle of the twentieth century.

Mob Loan Sharks

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 seems to have been 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 was 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.

But 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. But 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. Perhaps the sharks in this particular community were unusually placid, but it would not be surprising if the use of force was rare. It would not take many examples to teach the lesson to debtors, and excessive use of force would only scare off business. The economics of violence in the loan shark market ought to have diminished the resort to corporal or capital punishment.

The mob 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.

Payday Lending

Licensed payday advance businesses, which lend money at high rates of interest on the security of a postdated check, are often described as loan sharks by their critics. If illegal lending and violent debt collection methods are taken to be the essence of loansharking, the label is clearly inaccurate. But if the defining characteristics of loansharking are high interest rates and a credit product that traps debtors, then the label might apply. Today’s payday loan is a close cousin of the early twentieth century salary loan, the product to which the "shark" epithet was originally applied. The main difference is that today’s payday lenders have legal protection for their business in many states.

Yamikinyu in Japan

The regulation of moneylenders is typically much looser than that of banks. In Japan, Moneylending Control Law requires only registration in each prefecture. In Japan, as the decade-long depression lingers, banks are reluctant to spare money and regulation becomes tighter, illegal moneylending has become a social issue. Illegal moneylenders typically charge an interest of 30 or 50 percent in 10 days (in Japanese, these are called "to-san" ('to' meaning ten and 'san' meaning three) or "to-go" ('to' meaning ten and 'go' meaning five)), which is about 1800 percent per annum. This is against the law that sets the maximum interest rate at 29.2 percent. They usually do business with those who cannot get more money from banks, legitimate consumer loans, or credit cards.

Ah Long in Malaysia and Singapore

Ah Long (derived from the Cantonese phrase "daai ji lung", 大耳窿) is a term for illegal loan sharks in Malaysia and Singapore. They lend money to people who are unable to obtain loans from banks or other legal sources, mostly targeting habitual gamblers. They charge a very high interest rate (about 40% per month/fortnight which equals 1422%/33087% per annum due to the constantly compounding interest.) and frequently threaten violence (and administer it) towards those who fail to pay in time.

Many years ago, prior to the registration of mobile phone numbers in Malaysia, Ah Longs advertised their services merely by distributing their calling cards.

Red paint

When a person fails to pay in time, the Ah Long will spray, splash, or write in red paint on the walls of the house or property of that person as a threat of violence and to shame the borrower into repaying the loan. According to local police authorities, there have been cases where borrowers were beaten or had their property damaged or destroyed, and some victims have committed suicide.

Pig head

Pig heads are sometimes hung outside the borrower's house, as a form of intimidation as well as a way of 'marking' the person as a loan 'defaulter'.

Stolen items

Nowadays instead of waiting for the victim to pay up, Ah Longs now tend to break into victim's house and steal items worth the loan. This method is commonly used to save time and also effort.

Identity banner display

Recent cases shows that Ah Longs also displays the borrower's identity card on a huge banner and post it on fences. Since Ah Longs only need the identity card from borrowers, this tactic is becoming common so that the borrower will feel humiliated due to public attention and will quickly pay up.