Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Apr 24, 2013

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A loan shark is a lending organization or person who offers loans at excessively high interest rates.

Since personal loans and payday loans are both heavily contested forms of lending, there are varying opinions about what constitutes a loan shark in the industry.

Clay Sparkman, vice president of Fairfield Financial Services, said that just because someone charges higher rates and fees, it doesn’t make them a loan shark.

“What makes a lender or an individual a loan shark is being dishonest or misrepresenting someone or not fully representing the facts,” he said.

Nathan Popkins, founder of Cumulus Funding, has another view.

“A loan shark is an entity that takes advantage of someone’s need for money, and exploits the situation by earning a return that is vastly in excess of the risk they’re actually taking,” Popkins said. “In many cases, this comes bundled with hidden fees or unclear terms.”

One point that both Sparkman and Popkins agree on is the fact that loan sharks hide information from borrowers. And once borrowers have been burned by these lenders, they will have a difficult time trusting other lenders in the future.

When dealing with borrowers who have been burned in the past by loan sharks or unscrupulous lenders, Sparkman said you have to win back their trust. He said when you talk with them, “you can hear something in their tone of voice … their ability to trust is destroyed.”

Although loan sharks can be a negative force within the economy, some experts dispute if it is up to the government to oversee their roles.

Sparkman said that intense government regulation on loans such as personal loans and payday loans is “patronizing” because it seems as if they are protecting citizens from themselves.

“[They are saying] you people are too stupid to decide about what is a good loan and what is a bad loan,” he said.

He said the effort should be taken away from usury caps, and should focus on fraud instead. He continued stating that people are able to make decisions as long as they are provided with the correct information.

One expert, who used to work as a copywriter for a payday lender, was able to see the payday industry first hand and still believes it lacks the respect it deserves.

“There is no exploitation, value is being exchanged for value, needs are being met willingly,” said Simon Vainrub, who is now president of Vain Advertising Services. “In the end, it’s up to the individual to be responsible; the lender’s job is not to be your mommy or your daddy but to lend money for a profit.”

The option to take out a payday or personal loan in a time of need is a necessary outlet for many consumers. Although personal loans can carry high interest rates, they are meant to be short-term.

Vainrub said that consumers see a payday loan APR of 480 percent and believe it is abusive, but this is the APR for a two-week loan.

“Payday lending gets a bad rap because many people have a double standard when it comes to their perception of good businesses versus bad businesses,” he said.

The more a state limits legitimate payday lenders, the more likely illegal payday sharks will fill their void.

Vainrub said the consequences for short-term lending restrictions on payday and personal loans are similar to restrictions on guns, and the effects impact the economy and society in an unexpected way.

“Gun control only helps illegal gun smugglers make more money when they sell guns in cities like New York and Chicago. A prohibition of guns or alcohol only leads to illegal dealing of guns and alcohol,” he said. “Payday lending created a legal venue for people to get the help they need while being protected under the law.”