7-min read Feb 24, 2022

What Is A Loan Shark, and How To Protect Yourself

What Is A Loan Shark, and How To Protect Yourself

Many small businesses are struggling a lot right now with all their expenses, especially payroll. Now, while there are a lot of expenses you could put on credit or get an extension for, payroll isn’t one of them. If your business is strapped for cash, you should know that there are reputable places you can turn to that will give you the cash you need, fast. There are also people who will take advantage of your vulnerabilities to exploit you and can put you and your business in a position of a slow death, a financial hole you won’t be able to get out of. We are here to tell you the difference, and make sure you know how to protect yourself from the dangers of loan sharks.

The definition of loan sharks are money lenders that practice predatory lending. Think of sharks in the ocean that prey on their victims. They offer emergency loans to businesses with extremely high interest rates that will basically kill you. It is unfair, heartless, and exploitive but all they care about is to make a profit, and not about your failing business.

Money sharks are able to operate because many companies need a cash advance to pay their employees or run their operations, putting them in a very tight spot. It is very difficult for many small businesses to get a line of credit with traditional banks, and the process takes too long. High interest loans become a better and faster option to get the cash you need.

What Defines A Loan Shark?

Loan sharks are professionals who offer loans with extremely high interest rates, which can sometimes reach 300%-400% APR. In addition to the high interest, they tack on a lot of fees, many of them hidden fees, such as an underwriting fee. They also deceive the client of the true cost of the loan, for example they will tell you a lower rate and then you will find out that rate was for a short amount of time and the yearly interest is astronomical. If you fail to repay your loan on time, there will be even more fees which threatens the long-term financial health of the business. Loan sharks suck money from their clients and enforce their fees aggressively or force you to take another loan to repay the money you owe. They are relentless, aggressive in nature, unrelenting and unforgiving, especially when it comes to default or missed payments.

But not every high interest loan is a predatory loan, and not all lenders are loan sharks. There are situations where a high interest loan can be the best thing you can do for your business. Many lenders offer high risk loans with a quick application and approval process. All the fees are open and upfront, and everything is explained clearly and done professionally. The rates will be higher than traditional sources due to the higher level of risks that the lenders are taking, but nowhere near the 300% loan sharks charge. These loans are meant to be repaid in a relatively short period of time. In this way, the business can continue to function during a growth spurt or temporary cash shortage or hardship or until they can obtain a traditional loan. These loans help businesses in the short term to avoid many long-term schemes that will cripple your business.

How Much Do Loan Sharks Charge?

Loan shark interest rates are extremely high, sometimes up to 300-400% interest on the loan. For example, if you were to obtain a Merchant Cash Advance (MCA) of $40,000, you may be presented with a payment breakdown of $16,000 in interest and fees (aka a factor rate of 1.4). For a repayment rate of 3 months, your APR will end up being 288%. This APR rapidly rises further if your business has increased sales which allows you to pay off the loan earlier or if business has declining sales and you need to refinance the loan as the original fees don’t go away even on an early repayment.

Businesses who use loan sharks don’t know what they are getting into and may not fully understand the terms of the loan. But they are desperate and think this is their only option, with nowhere else to turn.

But now you know there are other options.

There are companies that are not loan sharks that offer high interest unsecured loans. These are expensive because they are high risk loans. But these legitimate lenders don’t try to take advantage of you. They are here to help you.

Are Loan Sharks Illegal?

Usury is the unfair and illegal practice of charging interest at unreasonably high rates to enrich the lender. The government passed usury laws that capped the interest rates that people can charge on loans. It varies by state.

Nonetheless, there are legal forms of loan sharking as well. These legal loan sharking lend money to businesses who are financially unable to repay it in the long term and charge high interest rates. This essentially kills the small businesses and many eventually declare bankruptcy.

For personal loans, there are predatory lenders who are sometimes referred to as loan sharks. For example Payday Loans, which is legal in 36 states and illegal in 14. The loans are much smaller, averaging around $500. The loan is usually borrowed against a future paycheck, hence the name “payday” loan.

So is it ever worth your while to use a loan shark or a predatory lending company? Not if there’s a better option.

How To Find Out If A Loan Shark Is Behind Your Loan Offer

To protect yourself from real loan sharks, be on the lookout for warning signs. Some signs of predatory lending practices may be:

  • Their interest rates are exorbitantly high- whereas legitimate high risk lenders have higher rates that are affordable.
  • High or hidden fees- legitimate lenders will explain all fees upfront, and not tack on any extra when you’re not looking.
  • Difficult repayment conditions.
  • “Instant” approval- fair lenders will do a background check and make sure you will be able to repay the loan.

Lookout for these warning signs:

  • Unlicensed lenders;
  • No paperwork, or rushed paperwork;
  • Don’t do background checks or credit checks;
  • Isn’t clear on the loan terms and won’t explain;
  • Extravagant rates or fees even if you repay on time
  • Extreme fees or conditions for defaulting

The best way to protect yourself against predatory lending is to ask a lot of questions, do a lot of research, and shop around. Take your time. Ask for recommendations of legal lending services that don’t have huge interest rates. Ask for references. Read the fine print and make sure you understand all the terms of the loan. There are many reputable lenders who will work with you even if you have bad or no credit. Protect your business from falling into a cycle of debt that you may never be able to climb out of.

We hope you found this guide on What Is A Loan Shark, and How To Protect Yourself useful! If you’re interested in learning more about the advantages of payroll funding, feel free to reach out to Payro Finance today!

Morris Reichman


Morris Reichman is the founder and CEO of Payro Finance. Former Vice President at Infinity Capital Funding an alternative finance company, Morris possesses a versatile background in the finance industry. Having spent 7+ years working across global macro operations and start up corporate finance Morris's expertise is in business accounting, risk management and investment analysis. Morris founded Payro Finance to support business owners and ensure their business continuity.

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