If not for Payday Loans, Would Loan Sharks Fill the Void?

The term “loan shark” was coined in America during the latter half of the 19th century, according to an article published in the Washington and Lee Law Review. The epithet was applied to lenders offering salary advances and chattel mortgages, which were types of loans that become prominent around the time of the Civil War. It did not imply that the loans were illegal, nor was it connected to organized crime — which was virtually non-existent at the time — or to lenders who collected debts through actual or threatened bodily injury should the borrower default. Over time, however, the public’s perception of a loan shark became one of a hardened criminal who would use force to collect on a debt. This is the image conjured up by most Americans when the question of whether loan sharks would replace payday lenders should the industry be regulated out of existence.

Payday Lending Regulations Have Increased Loan Sharking in the United Kingdom

Loan sharks began operating in the United Kingdom even earlier than in the United States. A law was enacted in 1900 in an attempt to eliminate extortionate lending practices, and the original law has been amended and altered several times in the intervening years. Despite these attempts, however, loan sharks never went away. After laws were passed in 2013 severely regulating payday lenders, loan sharks became even more prominent. From 2013 to 2014, the Illegal Money Lending Team reported a 62 percent increase in successful prosecutions of illegal lenders, according to City A.M.; an estimated 310,000 families or individuals owed money to loan sharks.

Does the UK’s Experience Translate to America?

Drawing a correlation between the UK and America when it comes to loan sharking is a difficult proposition. Despite an abundance of movies and television programs that suggest otherwise, loan sharks have never been plentiful throughout the United States. Most loan sharks operated in major cities, such as Chicago, New York, Boston and Philadelphia, that also had problems with organized crime, according to the aforementioned article in the Washington and Lee Law Review. The article makes several other interesting points:

• Even in the closing decades of the 20th century, violence as a means of collection was rarely employed.
• Loan sharks affiliated with organized crime families have shifted their “client base” and have not been interested in small-dollar loans to working people, preferring to focus on larger loans to gamblers, other criminals and business owners.
• Neither deregulation nor strict regulation on interest caps has been a reliable determining factor in whether loan sharks do a brisk business.
• Illegal loan sharks do not thrive in rural areas, the suburbs or small towns as they need to avoid attention or risk being discovered by local law enforcement.

Based on the evidence, therefore, it is unlikely that America would experience a significant surge in loan sharking activities should payday loans be outlawed.

Eliminating Payday Loans Could Leave Many Americans with Options Nearly as Bad

Even if loan sharking did not increase as a result of the dismantling of the payday loan industry, the options left for many Americans could be almost as dire as taking an illegal loan. The Pew Charitable Trust conducted a study of borrowers who used payday loans. They asked borrowers what they would do if payday loans were unavailable and they needed to meet a financial shortfall.

• 81 percent said they would have to reduce what they spent on groceries and clothing
• 62 percent said that they would have to delay paying one or more bills
• 57 percent said that they would be forced to pawn or sell their possessions

Another study conducted by Adair Morse of the University of Chicago found that payday lenders can provide some unexpected benefits. Morse’s study found that after a natural disaster, having access to credit reduced the rate of foreclosures and the incidence of property crimes or larceny committed by those in financial distress. Morse also found that the primary alternative to payday loans was bounced checks and/or overdraft loans from the bank.

Desperate People Sometimes Commit Desperate Acts

If payday loans were not available, would desperate borrowers turn to loan sharks? Some probably would if their situation were sufficiently dire. Others might write a check for necessities, knowing there are no funds in the account. Still others might engage in a criminal activity, such as embezzling from an employer or committing a burglary to obtain items to pawn or sell. Given the potential alternatives, it does not seem logical to destroy the payday loan industry.

Is a Payday Loan Right for You?

No one knows your financial situation better than you do. You are the only one who can decide whether the best solution for your financial challenge is a payday loan. No debt, including a payday loan, should be incurred without having a complete understanding of the terms, how the loan works and what your obligations will be. You can investigate payday loans further by going to PersonalMoneyStore.com.