Sixteen Differences Between Payday Lenders and Loan Sharks

Ever since John C. Bersia coined the term “legal loan shark” in his Pulitzer Prize winning editorial entitled Fleeced in Florida, media sources and consumer advocates have referred to payday lenders as loan sharks. Is this comparison fair to payday lenders? Is it fair to loan sharks? This table lists sixteen differences between payday lenders and loan sharks.

Criteria
Payday Lender
Loan Shark
Remarks
APR
391% – 782%
152%
Payday lender APR may exceed 1,500% on loans of shorter duration. In most cases, loansharks do not exceed 250% APR.
Rates Can Be Negotiated
No
Yes
Loan sharks may reduce rates for community businesses.
Frequent Borrower Discounts
Rare
Common
Frequent borrowers can expect discounts from loan sharks.
Grace Periods Granted
No
Maybe
Loan sharks may grant grace periods.
Legality
Legal

Illegal

Many payday lenders are licensed, adhere to state consumer protection laws and operate legally. Illegal loan sharks operate outside the law.
Licensing
Licensed
Unlicensed
Payday lenders are usually licensed by your state’s department of financial institutions.
Lender Bound by Truth in Lending Act
Yes
No
Loan sharks are illegal so they are not bound by the Truth in Lending Act.
Lender Bound by Fair Debt Collection Practices Acts
No
No
Loan sharks are illegal so they are not bound by the Fair Debt Collection Practices Act. Payday lenders are not bound by the FDCPA because they do not meet the definition of “debt collector” under federal law.
Borrower Under Legal Obligation to Repay
Yes
No
Loan sharks operate illegally so borrower is under no legal obligation to repay.
Lender has Legal Right to Recover Debt
Yes
No
Loan sharks are not legal lenders so they have no legal right to recover debt.
Repayment Helps Credit Rating
No
No
Payday lenders and loan sharks do not report to the major credit reporting agencies.
Failure to Repay Harms Credit Rating
Maybe
No
A payday lender may send your account to a collection agency which can harm your credit rating.
Harassment Used to Recover Debt
Maybe
Yes
Unlicensed payday lenders may use harassment to recover debt. Loan sharks definitely will.
Threat of Criminal Prosecution Used to Recover Debt
Maybe
Maybe
Threats of criminal prosecution and jail may be used. In most cases, these are nothing more than empty threats.
Personal Property Illegally Seized to Recover Debt
No
Yes
Loan sharks may break into your home and seize property to recover unpaid debt.
Threat of Violence Used to Recover Debt
No
Yes
Violence attracts police attention. Most loan sharks prefer to seize personal property but some will resort to violence. Licensed payday lenders will never use violence.
Declaring Bankruptcy Clears Debt
Yes
No
Loan sharks will pursue borrowers even after they have declared bankruptcy.

While many media sources and consumer advocates refer to payday lenders as “legal loan sharks” the comparison is:

  • not fair to payday lenders (who are licensed and never use violence)
  • not fair to loan sharks (who offer better rates/terms but are illegal)

Although this article compares loan sharks and payday lenders, it does NOT promote or endorse either.

You should never approach loan sharks or any other illegal business.

Payday lenders should only be used as a last resort after cheaper payday loan alternatives have been considered.

Sources:
Free the Sharks! by Brendan Koerner (Slate)
Dealing with Loan Sharks (DirectGov UK – Now a Dead Link)
Fleeced in Florida by John C. Bersia (The Pulitzer Prize Winners 2000 – The Pulitzer Board)

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