One of the biggest tricks of a loan shark is that it’ll rarely display its real nature at first.
Around two-thirds of people who have been affected by unlawful lending, vicious interest rates, and aggressive collections believed the lender was a friend, or at least someone trustworthy.
Many borrowers who fall prey to loan sharks do so because they’ve hit a financial stumbling block, scrambling around for a fast, easy solution – which is invariably what this type of lending is portrayed to be.
Today, we share insights from the regulated credit provider Wonga and their recently published ‘informal lending report’ to help you spot a potential loan shark and assess the options to borrow responsibly from a reputable lender.
How the Pandemic Created an Illegal Lending Goldmine
During lockdown, when millions of us were suffering from disconnection and bans on travelling to see loved ones, we fell back on social media.
Downloads of video chat apps went sky high, and local WhatsApp and Facebook groups popped up everywhere, helping people feel a sense of community to share their woes and enjoy socialising – even if only digitally.
This unique scenario is a loan shark’s dream – as reported by the England Illegal Money Lending Team (IMLT).
Conventionally, a loan shark would work in local areas, posing as a wealthy or trusted individual who would offer small loans with favourable rates to those in need or who couldn’t access standard forms of borrowing.
These days, loan sharks have crept into the cyber world.
In 2020, IMLT recorded that 10% of victims met a loan shark on social media or through a dating website.
Social media also adds a sinister undertone to repayment threats, such as blackmailing individuals into remaining silent or coughing up horrendously high repayments for fear of being exposed to their community groups.
Why People Are Persuaded to Borrow From Loan Sharks
The psychology and financial literacy behind any decision to borrow from a loan shark – in some cases, knowingly – is complex.
There are multiple factors rolled up into this, such as:
- Fear or distrust of banks or regulated lenders.
- An assumption that a legitimate lender would reject the applicant.
- Desperation to receive funds extremely quickly.
- Lack of access to the internet or the absence of local banking branches.
- Wanting to borrow very small values, which a formal lender wouldn’t consider.
These elements mean that those most likely to be targeted by loan sharks are more at risk, often in marginalised or minority communities, or feel excluded from normal lending structures.
Therefore, combatting loan sharks isn’t just about stamping out criminal activity and supporting victims who have been tricked out of substantial sums they cannot afford.
The key to stopping loan sharking is to improve awareness and access to those authentic lenders that can provide a lifeline to people in severe financial distress – without the potentially violent outcomes.
Typical loan shark interest rates fall between 30-50%, compared to an average of about 9-10% from a bank.
The Importance of Borrowing From a Regulated Lender
The Financial Conduct Authority authorises banks and lending providers – anybody who isn’t registered and doesn’t have a valid membership identifier is not a legal lender.
While many people are skeptical about the honesty of banks, this regulation is a major resource to protect consumers from unethical lending practices.
To summarise, in the UK any organisation providing loans needs to:
- Treat customers fairly, without discriminating.
- Have provision to support vulnerable consumers.
- Promote and advertise financial products in line with regulations.
- Offer contracts without any terms considered unfair.
- Implement defined complaints handling processes.
Laws against mis-selling and deception mean that, as a minimum, you’ll be provided with full terms and conditions, details about the exact interest rate payable, and a schedule of penalties and late payment charges before you sign a loan agreement.
These bits of paperwork are a world away from a loan shark.
Criminal lenders are deliberately vague about the interest they will charge – whereas a regulated loan provider must provide comparable APR metrics to help consumers make informed decisions.
Breaking Free of Loan Shark Lending
During the Coronavirus pandemic, loan sharks have thrived, not just because of increasing consumer susceptibility but also because of the drop in the capacity to investigate potential regulation breaches.
Consumers who don’t have access to mainstream borrowing are usually the prime targets for criminals, who recognise that they may not understand the severity of the situation they might end up in.
Banks also decreased lending sharply, restricting new loan approvals only to pre-existing customers, balancing demand against a much-reduced workforce.
What To Do If You Have Been Affected by Loan Sharking
If you are concerned that you, or somebody close, has been impacted by loan sharking, the first recommendation we’d make is to report them, even if you have managed to repay the debt and take back control.
There are numerous reasons to do so:
- Loan sharks sometimes imply that a ‘customer’ will be prosecuted or sent to prison if they don’t pay up – this is untrue. An illegal lender has no power to take legal action.
- Victims are not legally obliged to repay a loan shark because the lender isn’t regulated and has no authority to make a loan or recover the debt.
- When these situations become fraught, it can lead to harassment, thefts, destruction of property and even extreme violence.
On the other hand, regulated lenders have structures to offer guidance and support if customers find themselves unable to pay.
Eligibility checks and affordability assessments at the point of application ensure the lender knows whether the applicant can reasonably cope with the level of debt.
They may also offer alternative products, or loans with a longer-term, to ensure they don’t lend irresponsibly and exacerbate the financial issue.
Reporting a loan shark to trading standards or the police means that their unlawful lending won’t continue to take advantage of those most in need and can break the cycle of intimidation.