Loan Sharking

Loan sharking is the illegal practice of lending money at extremely high interest rates, often with little to no paperwork, and using intimidation or violence to collect debts. This predatory activity preys on individuals who are financially desperate and cannot access traditional credit from banks or other legitimate financial institutions. Unlike regulated lenders, loan sharks operate outside the law, setting their own exorbitant terms and employing coercive tactics. The interest rates are so high that they often create a debt trap, where the borrower can never realistically repay the principal because the interest compounds at an astronomical rate, ensuring a steady stream of income for the shark at the ruinous expense of the victim.

Loan sharks have a simple but vicious business model. They target vulnerable individuals—those with poor credit, recent job loss, or urgent cash needs—who are locked out of the legitimate financial system. The process is deceptively straightforward.

• The Bait: An offer of quick, easy cash with no credit check and no questions asked.
• The Hook: The loan is given, but the terms are verbal or written in a deliberately confusing way. The true interest rate, often quoted on a weekly or even daily basis, is obscured. A 10% weekly interest rate, for example, translates to an Annual Percentage Rate (APR) of over 14,000%, a rate far beyond legal limits known as usury.
• The Trap: The borrower quickly falls behind on payments due to the impossible interest rates. The outstanding balance balloons, making repayment impossible.
• The Threat: When the borrower inevitably defaults, the loan shark resorts to threats, harassment, and violence against the borrower or their family to enforce collection. The debt becomes a tool for control and long-term exploitation, not a simple financial transaction.

It's crucial to distinguish illegal loan sharking from legal, albeit often controversial, forms of high-interest lending. While they might seem similar on the surface, the key difference is legality and regulation.

• Loan Sharking (Illegal): Operates completely outside the law. There are no legal contracts, no consumer protections, and collection methods are criminal. Interest rates are uncapped and designed to be impossible to repay.
• Payday Loans (Legal, but Regulated): These are short-term, high-interest loans that are legal in many jurisdictions but are heavily regulated. Lenders must disclose the APR, adhere to state-mandated interest rate caps, and follow legal collection processes. They cannot resort to violence or illegal threats.
• Subprime Lending (Legal, but Regulated): This involves lending to borrowers with poor credit histories at higher-than-average interest rates to compensate for increased risk. However, these lenders are regulated financial institutions that must operate within the legal framework for lending, collateral, and collections.

For a value investor, loan sharking is the absolute antithesis of sound financial practice. It is a system of pure wealth extraction, not wealth creation. While you are unlikely to find a loan shark's operation listed on the stock exchange, the principles behind it offer a powerful lesson in what to avoid. An investor should be extremely wary of any publicly-traded company that exhibits “loan shark-like” characteristics. This includes businesses built on predatory lending, opaque terms, and exploitative fees that trap customers in cycles of debt. Such business models are inherently unstable and morally bankrupt. They attract intense regulatory scrutiny, face constant legal challenges, and suffer from terrible reputational risk. A company that profits from its customers' desperation rather than from providing a genuinely valuable good or service lacks a sustainable competitive advantage, or a “moat.” Eventually, regulators will crack down, or customers will find alternatives, leading to a collapse in shareholder value. The core tenet of value investing is to find wonderful businesses at fair prices. A business built on preying upon the vulnerable is, by definition, not a wonderful business. It is a ticking time bomb, and a wise investor stays far, far away.