When people think of short-term cash advances the first thing people think of is a shady mobster operating out of a city alley with his muscle "Bruno" standing behind him with a baseball bat for late payments. If illegal lending and violent debt collection methods are what define loan sharking, the label is clearly inaccurate.
There are many critics who quickly label payday lenders "loan sharks" without realizing just how drastic the difference is between them. The availability of these payday advances has actually made true loan sharks scarce, which is safer for borrowers in desperate needs of money.
1. Business Operation
Loan Sharks operate only in cash. They'll work with people who don't have bank accounts. Since there is no written contract, no banking paper trail it's very hard to track the actual interest rate and also very hard to prove
A Payday Loan requires a bank account so interest rates and fees can be tracked. Now online payday loans are available and you can keep track of your loans and when you've paid them.
2. Typical Client
Loan sharks actually prefer to work with small and medium business owners. These customers are more likely to possess assets that could be seized if the loan is in default, or even worse, the business owners themselves was forced to participate crime by assisting the loan sharks by laundering money. Gamblers are also a favorite customer, and so are other criminals since you can't get a bank loan to finance illegal operation like selling drugs.
Payday Loans are used by working adults who need emergency cash. There are several reasons why someone would need one. An unexpected car problem that needs to be fixed so you can go to work. Emergency travel expenses due to a family member being sick and a broken heater in the middle of a harsh winter are all reasons people use payday loans to help support themselves when things are tight.
3. Up-Front Collateral
Loan Sharks frequently require an asset to hold onto before the loan is given. It can be anything from a television set, stereo or anything of value that they can keep if you don't pay the loan back or you pay it back late.
Direct payday lenders sometimes hold onto a personal check for the loan amount plus the fee. More commonly, they'll record your bank account and routing number and debit the amount you owe. An established lender would never ask you to leave your TV with them.
4. Interest Rate
Loan shark interest rates are practically limitless. They operate illegally so they can dictate how much you have to pay them back
Payday loans are controlled by state laws
5. Late and Missing Payments
Loan Shark: Broken thumbs
Payday loans assess additional fees for late payments, like you would get if you missed a credit card payment. They are also controlled by state laws so the additional fees are limited and you can expect consistency from lender to lender. If you miss payments or default on a loan many states have programs so you can set up a payment plan.
6. The Real Difference Between Payday Loan and Loan Shark:
The main difference, which most people forget, is that payday lending is a legitimate business and loan sharking is illegal.