Loan Sharks - What You Need to Know

[Pablo Donnell]

Loan sharking is the practice of lending money to desperate people at
extremely high and illegal rates of interest. Loan sharks, or
shylocks, make a big profit from people who can't get loans from
legitimate sources, such as banks or other lending institutions. For
as long as people have needed money they don't have, there have been
loan sharks there to provide their services for a fee. They introduce
themselves as a solution to a problem; they are businessmen who want
to help a borrower get out of a bind. Prey to these sharks can be
compulsive gamblers, single parents, the elderly, illegal immigrants,
white-collar executives, or anybody else who desperately needs more
money than they have access to.
Most people associate loan sharks with gangsters and organized crime.
Loan sharking is a very lucrative business for criminals, and it's a
major source of income for the crime families. They receive a very
good rate of return on their investment, and in a short amount of
time, often a matter of weeks. They may charge interest at rates of up
to 20% per week, and possibly even higher. In one New York
investigation, it was found that a loan shark syndicate was netting
3000% annual interest! Dallas mobsters were more competitively priced,
they charged only 585% annual interest. These were rates in the
ghetto. Shylocks would be more competitively priced for corporate
white-collar businessmen; rates might be more in the 5% weekly range.
In the mafia world, shylocking is also known as six-for-five; you
borrow five and pay back six at the end of the week. You can see how
this can turn very expensive. If someone borrowed five hundred and did
not have the full payment, the loan shark would accept the interest
payment of one hundred and extend the loan for another week, with
interest. If they can't pay when they're supposed to, they would be
forced to take out another loan, interest is added on top of interest
and the debt can quickly become impossible to get out of.
The funds for shylocking would usually come from the top, the family
boss. The boss would loan money to his capos (lieutenants), knowing he
could trust them to pay him back with interest. The capos then loan
money with interest to the lower ranking members of the mob. These are
the loan sharks that made loans to the common citizen, and enforced
payment.
Loan sharks ensured payment with threats of violence. They require no
collateral other than the borrower and his family's well being. "Leg-
breakers" were often employed by loan sharks to be sure they receive
payment. It's not true that people were always killed if they didn't
pay. Dead people can't pay back their debts, so it would not be good
business practice to eliminate resources. They would occasionally
"make an example" of some who owed very little to be sure other
borrowers took them seriously. The borrower, worrying about life and
limb of himself and his family, would have no option but to pay the
shylock even if it meant he had to lie, cheat, or steal.
Modern Day Predatory Lending
There is no legal definition for predatory lending, but it generally
includes the use of unethical practices by lenders who use tactics
that skirt around the law. They might give unfair loan terms, use
confusing language, charge hidden fees, and use high-pressure sales
methods. They make money as long as they can keep borrowers in debt to
them. They commonly target the elderly, low-income, minorities, or
people with poor credit, but anyone can be a victim of these
unscrupulous lenders. Predatory lenders thrive on consumers who need
or want more than they can afford to have, and trick borrowers into
believing the loans are necessary and affordable.
Many commonly accepted loan services are available to consumers that
work on the same principles as a mob shylock. There are laws
regulating the amount of interest that can be charged for a loan, but
lenders can charge "service fees." Check cashing places offer "payday
loans", you can write them a post-dated check for the amount of the
loan, plus a hefty fee for use of that money for a week or two. The
fees can amount to 400% APR, these places are happy to loan as much as
possible based on the borrower's expected paycheck. Then what happens
when he gets his paycheck and realizes that it's already spent? He'll
go back to take out another payday loan so he can pay his bills and
buy groceries. This cycle of borrowing more to pay back a loan can
trap a person into being perpetually in debt and never getting ahead.
These places are usually found on the same block as a liquor store in
low-income neighborhoods. These lenders prey on people with limited
means and encourage them to live paycheck to paycheck.
Title loans are another way people are getting ripped off. People who
own their car free and clear can bring in their title and an extra set
of keys, and drive away with up to half the value of their car. They
agree to a loan at an extremely high rate, or with a large balloon
payment without realistically being able to pay. The title loan
companies don't care what kind of credit the borrower has, because
they win either way. They receive an excellent profit on the interest
charges or they repossess the car and sell it for twice the loan
amount. Sounds like a "can't lose" situation for them, so it must be a
"can't win" situation for the borrower.
I've heard predatory commercials on the radio from car dealerships.
The announcer might say something ridiculous like, "We'll give you
$5000 for your trade on anything you can push, pull, or tow in here,
and we don't care how ugly it is!" We'd all be rich if we could sell
junk cars for $5000, but who would buy one? These predatory lenders
just add that $5000 that they "gave" you to the price of your new car
being financed. You'll drive away in a shiny new car and you'll get
stuck with a loan for $5000 more than the car is worth.
What if you owe more on your trade-in than it's value? It's known as a
negative equity loan or an upside down loan. This is quite common,
considering car dealers want to sell expensive cars more than cheaper
ones, and consumers want to drive the best car they can get a loan
for. Cars depreciate faster than the loan can be paid down, and when
you spread the payments over five or six years instead of three, this
can amount to thousands of dollars. Eager to sell you another new car,
dealerships work with lenders and add the difference to your loan
amount, ensuring that vicious debt cycle.
It is appalling that greedy predatory lenders would go so far as to
trick people out of their homes, but it happens. Abundant offers for
second mortgages or use credit card balance transfers to pay off
credit card debt come daily in the mail. It's shocking that lenders
would encourage you to take equity from your home to buy a two-week
vacation, a hot tub, a motorcycle, or other big "toys". Would a
sensible person really want to pay 15-30 years with interest for some
unnecessary material items that make life just a little more fun?
These predatory lenders like to remind you of all the improvements you
could make in your life if you just had access to the equity in your
home. They encourage you to dream of everything you're missing out on
because your assets are tied up in your house. They sell you on the
idea that you'll "save" money by consolidating your high interest
debt. You might have smaller monthly payments... but the debt is
stretched out over many years, increasing your total interest costs.
Many borrowers just rack up new debt after getting that second
mortgage to pay off bills because their formerly maxed out credit
cards are now freed up again. When the borrower can't afford his
mortgage, second mortgage, and new credit card debt, the home goes
into foreclosure and the borrower loses everything he's worked for.
Home-improvement scams have also hit America hard, particularly the
elderly. Someone who has been making regular mortgage payments for
many years has most likely built up lots of equity in their home,
which makes them a prime target for these ruthless predators.
Contractors offer to make repairs or improvements to the home, and can
even be so "helpful" as to set up financing for the unsuspecting
homeowner. An elderly widow, who can't do the work herself, is
grateful for the nice young man who can help her get her home back in
shape. When it comes to the confusing legal jargon in the contract,
she trusts him and his simple explanation of what it is she's signing.
She unknowingly agrees to take out a high-interest second mortgage
that requires a balloon payment at the end. She later finds out that
all her payments have gone to pay mostly interest, barely making a
dent in the principle owed. She can't pay the huge balloon payment
when due, and loses her house in foreclosure. It is unfortunate that
these predators are willing to put someone's grandmother out of her
home to make their fortune.
My neighborhood is several years old and a part of it is still in
construction. This addition draws many first-time homebuyers. When I
shopped for mortgages, I thought it was odd that my builder's mortgage
lender approved my loan for an amount about 30% more than a regular
mortgage broker could get for me. Don't we all want the best house we
can afford? It's tempting to take a mortgage that's barely affordable,
to get that bigger house with more options. It's interesting to note
that there are quite a few foreclosures in this neighborhood, usually
the houses that are about two years old. On brand new homes, you would
only pay taxes on the value of the empty lot, that is, until it is
reassessed with the value of the house on it. This happens where I
live about a year and a half after the home is built and closed on.
The mortgage lender does warn you that your payments will go up in a
couple of years after the taxes are reassessed, but still approves
your mortgage based on your current income and the tax on the empty
lot. You might not think much of it then because you believe you'll
figure something out by the time your payments go up. About 18 months
later, your PITI payment increases by a couple of hundred dollars a
month, but your income hasn't. Many families have lost their homes to
foreclosure because they weren't prepared for this dramatic increase
in payment.
Predatory lending has many more faces; I gave just a few examples.
You've heard of scams people have reported in the newspapers. You can
read about victims in internet blogs. The nightly news is always
showing a new story about a new way predators are trying to take our
money. You've seen the ads that the lenders themselves have run. These
unscrupulous businesses may be fraudulent, or just plain tricky. They
thrive on the "Gotta have it now" attitude that many consumers live
by. The only way to protect yourself is to educate yourself. I've
referred to the borrowers several times as "victims", but truly they
are victims of their own lack of awareness.
Protect Yourself From Predatory Lenders


Use your financial common sense; if you can't afford it, you shouldn't
buy it.
Plan a realistic budget and stick to it.
Have a savings plan so that you'll be prepared in case of a true
emergency.
Keep your credit rating high so that you won't be forced to go with
"sub-prime" lenders, where predatory lending is common.
Be skeptical about quick fixes and easy money.
If it sounds too good to be true, it probably is.
Bad credit, no credit, no problem! This is one of predatory lenders
favorite lines.
Buy here, pay here! Rent to own. No money down! You must act now! Some
of their other favorite lines.
Any loan, including your first mortgage, which uses the equity in your
house as collateral should be looked at very carefully.
Know what it is you're signing, and never sign documents that don't
have all the terms filled in.
If you don't understand the contract in question, consult an attorney.
Lawyer fees can be a bargain compared to the potential loss.
Shop around for loans of any kind; never say yes to the first offer.
Visit The Center For Responsible Lending for information about laws to
protect you, or how you can get involved in the fight against
predatory lending.
Don't let salesmen pressure you into something you aren't sure about.
Refuse to take out more loans to pay off already unmanageable debts.
Beware of the temptingly low interest rates that skyrocket after
you've had enough time to shop more than you should.
Take responsibility for your financial well-being.
Predatory lenders are out there taking money, but don't let them take
yours.