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What is a loan shark? Definition, meaning in business, and risks

What is a loan shark? Definition, meaning in business, and risks

Loans have emerged as an essential financial tool in recent years. With careful planning, loans can not only let you indulge in materialistic needs but can also provide financial aid in times of emergencies.

However, not everyone can take advantage of loans. Most financial institutions deny loans to individuals with a bad credit score or no sources of income. Desperate for money, these unfortunate souls often end up as victims of cunning loan sharks.

In this article, we delve into the depths of this issue, exploring what a loan shark is, how to identify one, and, most importantly, how to stay safe.

Loan shark definition: What does loan shark mean in banking & business?

A loan shark, also known as a money shark, is someone or a group that engages in predatory lending practices outside the boundaries of the law. Unlike legitimate financial institutions, loan sharks do not follow the regulations set by the RBI.

With their local network, loan sharks seek out vulnerable individuals in desperate need of money. Benefiting from their situation, the lenders offer them instant cash even with a poor credit history. However, these loans are provided without any clarity on the loan terms.

As a result, the people caught in this trap often get stuck in a vicious cycle of debt, struggling to make payments that don’t seem to dent the original amount they owe. When they fail to repay their debt, these lenders send goons to threaten and extort money by any means necessary.

How does loan sharking work?

Now that you’ve understood loan sharks’ meaning, it’s time to focus on how they work. A loan shark offers cash without performing any checks on the borrower. So, they may seem like a savior, but their working style is absolutely unsafe.

  1. Keep personal belongings as security: A loan shark will take jewelry, property papers, or ID cards and give you money without a legal agreement.
  2. Transfer money immediately: A loan shark lends money without background verification. This may seem lucrative, but there is no safety like banks.
  3. Collects money frequently: Unlike bank loans that have a monthly installment, loan sharks can ask for small payments often. Most of these payments cover only the high interest, with the actual loan never getting repaid.

How to identify a loan shark: Typical loan shark tactics

Knowing how to spot a loan shark is essential to safeguard yourself from falling into their traps. Keep an eye out for these red flags in a lender:

  1. No official authorization: Legitimate lenders are registered and overseen by financial authorities. However, loan sharks frequently lack the licenses and approvals to function as legitimate lenders.
  2. Pushy tactics: Loan sharks might use forceful methods to pressure you into quick decisions. They often make the offer seem lucrative and make you feel like you will lose an excellent opportunity if you don’t agree to their terms immediately.
  3. Lack of clarity: Reputable lenders provide transparent documentation that clearly spells out loan terms, interest rates, extra charges, and repayment plans. On the other hand, loan sharks might dodge offering detailed information, leaving borrowers clueless about the actual loan costs.
  4. Extremely high interest rates: A major red flag for spotting a loan shark is the excessively high interest rate they impose, often surpassing legal limits by a large margin. These high and recurring interest rates often end up being much larger than the initial borrowed sum.

Risks and disadvantages of using a loan shark

Loan sharks may seem helpful, but here are the risks and disadvantages you may face in the future:

  1. Hidden charges: Since there is no legal agreement, you can be asked to pay any fees at any time. You can’t judge the actual loan cost until it is too late.
  2. Harassment: Loan sharks can threaten and intimidate you by sending goons. They can put you under a lot of mental stress.
  3. Excessive interest: Loan sharks levy a higher rate of interest, making you repay a lot more than the borrowed amount.
  4. Collateral loss: If you fail to repay the loan, loan sharks can seize your assets illegally.

How to deal with loan sharks: Risks & safety steps

You can steer clear of illegal money sharks by following these tactics:

  1. Do your homework: It’s always wise to thoroughly research a lender before taking a loan. Ensure they have the necessary licenses and are regulated by the appropriate financial authorities.
  2. Go through the details: Take your time to read and understand all the loan documents before putting your signature on anything. Trustworthy lenders provide clear and easy-to-understand terms and conditions without hurrying you to decide.
  3. Compare different options: Don’t hesitate to get loan quotes from several lenders. Comparing interest rates and loan terms can help you spot offers that don’t make sense.
  4. Report anything fishy: The government has been taking measures to stop illegal moneylending practices in India. So, if you suspect that a lender is using unfair tactics, report them to the relevant authorities immediately.

Why do people turn to loan sharks?

Individuals turn to loan sharks when they have urgent financial needs, and banks and formal financial institutions are of no help. Their loan applications are often rejected because of low income, poor credit scores, or no collateral.

Loan sharks offer instant cash with minimal paperwork. This may seem convenient during difficult situations. However, what many borrowers don’t understand is the loan shark meaning in business. There are many associated risks and challenges. But since the need for funds is urgent, a lack of financial awareness and delays in bank loan approvals push people toward these illegal lenders.

Conclusion

Loan sharking has been a concern for ages now. Most people believe that illegal money lending is restricted to rural areas, but that is not the case. With many unlawful money lending apps also emerging recently, more people are prone to being loan-sharking victims than ever before.

Hence, it is always advised to take loans from reputed and trusted financial institutions like Tata Capital. With loan transparency, competitive interest rates, and flexible eligibility criteria, Tata Capital ensures your loan process is seamless and safe. Apply for a personal loan today!

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FAQs

What is a loan shark, and how do they operate?

A loan shark is an unauthorized, illegal moneylender who offers instant loans at very high interest rates. These individuals do not follow any legal or regulatory rules. They use threats or pressure to extort money if you delay repayment. 

What is the meaning of loan shark in business and finance?

A loan shark’s meaning in business and finance is that of an unlicensed lender who imposes unfair terms and charges exorbitant interest. A loan shark also uses illegal or unethical methods of recovering money.

Are loan shark loans legal in India?

No, loan shark loans aren’t legal in India. These individuals operate without RBI approval, violate state moneylending laws, and do not legally protect borrowers.

How can you spot or identify a loan shark?

The top signs to identify a loan shark are as follows:

  • Instant cash disbursal
  • Very high interest
  • No written agreement
  • No to minimal documentation requirements
  • Try to push with urgency
  • Offer too good to be true deals

What risks are involved in borrowing from a loan shark?

Borrowing from a loan shark can lead to debt traps, threats, harassment, violence, and collateral loss. Their illegal money recovery practices can cause severe mental stress.

What is the difference between a loan shark and a licensed lender?

A loan shark is an illegal, unregistered lender. It charges excessive interest and uses unethical tactics. A licensed lender complies with RBI guidelines, levies standard interest rates, and uses legal recovery methods.

Where can I report a loan shark in India?

You can report a loan shark to the local police or the National Cyber Crime Reporting Portal through their website - www.cybercrime.gov.in - or the helpline 1930. You can also use RBI’s CMS portal or reach out to the Banking Ombudsman.

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