The loan shark is generally an illegal bank lending behind the scenes but it is also a sign of a vacuum in the financial sectors. Mainstream banks have traditionally maintained very strict lending rules, often appearing to have no time for the economically disadvantaged. It is this gap that the shylock saw and decided to exploit. It is a high time that banks and micro-finance institutions delved to fill this gap and develop products for this groups.
Main characteristics of loan sharks
High interest rates often charges on daily or monthly basis. Unlike normal banks these loan sharks operate outside the regulation of lending laws or banking act which often restrict bank to interest rate ceilings. Banks also mainly charge and annual rate which is more predictable. The loan shark business is often illegal and seeks to exploit the borrower.
Very high charges and penalties on default which are often unclear. Banks will disclose their charges and penalties beforehand.
Very short repayment terms. Loan sharks are out to make fast money and want to lend as many people as possible, so they will often prefer to lend for the shortest period possible. Banks charge interest annually and you can repay your loan over a period of time, you can also renegotiate your loan in case you have problems affecting your schedule
Unclear records. In most cases the records including lending agreement and repayments are not disclosed to the borrower, leaving him at the mercy of the lender. Often the process of negotiating a loan from a bank or micro-finance institution is lengthy and the borrower becomes familiar with the terms over this period.
Deliberate failure to disclose the rates of interest charges and subsequent penalties .Regulated financial institutions are bound by law to disclose all terms and conditions of the loans
Hidden charges which ultimately add to the cost of borrowing and strain the borrower. Banks and other financial institutions which fail to disclose all charges relating to a loan can be penalized.
High prepayment. To reduce the risk the lender will ask for a high prepayment and no grace period, this makes the loan less useful to the borrower. In contrast banks sometimes offer a grace period to a borrower when the need arises.
Unclear address or location .while some loan sharks operate online others will operate on the streets or even in unknown offices. Banks have various branches where borrowers can visit to seek clarification on any matter.
Illegal business. Most of the businesses are not registered and operate illegally. All banks and financial institutions have registered offices.
These lenders often use threat, coercion or outright violence to collect payment.
This happen because the loan often does not meet legal standards, thus making it difficult for the lender to claim legally. The borrower is often not legally bound to meet the loan conditions.
Because the rate of default is high, loan sharks will pressure a borrower to take a fresh loan to be able to clear, thus putting the borrower in and endless debt cycle and increasing business for the lender.
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