Payday Lender vs. Usurer: Is There Really a Difference?


CLEVELAND, Ohio – The term “loan shark” might sound like a scene in a movie where a gangster puts a crowbar to the kneecap of an unlucky gambler who can’t pay off a loan.

The term “payday lender” can conjure up an image of a legitimate business, accompanied by a bright green sign, offering loans at extremely high interest rates aimed at people with low incomes or who would otherwise not. eligible for traditional funding.

Are they the same?

The answer: sort of.

Historically, a “loan shark” describes a lender who charges very high rates, said Anne Fleming, associate professor of law at Georgetown University, in an email.

The term is prevalent in Cleveland and Ohio as the state is littered with companies and chains offering short-term loans with some of the highest annual interest rates in the country.

Like home from Ohio is ready thursday to pass a bill that would cap fees and interest rates on short-term loans, experts say there is little difference between what were historically called “loan sharks” – with their quasi-legal or downright criminal operations – and what now pass as legal and utterly flawless businesses.

Salary purchase

While the operations aren’t exactly the same as in the modern payday lending industry, experts say there’s a direct line between the loans of 100 years ago and the stores littering malls. and occasional fast food restaurants in cities across the country. .

Charles Geisst, professor of economics and finance at Manhattan College who published in 2017 the book “Loan Sharks: The Birth of Predatory Lending”, said that for the turn of the 20th century and the following decades, the preferred method of obtaining short-term loans in large cities were made through what was called “payday buying” or “payday loans”.

Back then, these lenders were giving cash-strapped workers an advance on their next paycheck, but with about 20% less for fees and interest.

If the borrower couldn’t repay the loan on its due date, he could postpone it and pay more interest, said Robert Mayer, professor of political science at Loyola University in Chicago.

At the time, such transactions were generally illegal, according to the state and its usury laws, but not necessarily criminal, said Mayer, who wrote the 2010 book “Quick Cash: The Story of the Loan Shark. “. It was not uncommon for loans to have annual interest rates of 200% or more, he said.

Businesses had ways of ensuring that borrowers paid off their loans on time. Some used “salary assignments,” which were essentially liens placed on paychecks, Mayer said.

The specter of a lender showing up at an employer’s payroll office and telling the employer that one of their employees was borrowing money was often enough to scare people into paying on time. At that time, a boss’s discovery of a wage assignment was enough for him to fire an employee, Mayer said.

All of these tactics have earned many companies the title of “loan shark,” he said.

Organized crime

As the fast-paced 1920s gave way to the Great Depression, it was accompanied by lending reform that generally aimed to make loans to the financially better off, Mayer said. This has left the demand unmet for the quick cash flow that low-income workers need.

Get into the mafia and the tactics that have led to what the public generally thinks of as a “lender shark”.

Between the 1930s and the 1960s, much of the small lending industry shifted from semi-legal to full-fledged criminal. Mafia members loaned people small amounts of money, often with inflated interest rates. People knew they had to pay on time because they heard stories about what happened if they didn’t, Mayer said.

But despite the Mafia’s reputation – whether they break a hand or threaten a loved one if they don’t get paid – relatively few borrowers have suffered abuse over delinquent loans, experts say. On the contrary, the mafia stories hurting other people did a lot to ensure that the money was paid on time.

“It turns out that reputation matters a lot,” Mayer said.

3. The modern short-term loan

When the FBI cracked down on the Mafia in the 1970s and 1980s, many lenders also disappeared. At the same time, many states have passed legislation legalizing the modern system of short-term loans.

Such laws have been passed in all parts of the country, allowing businesses to spring up and meet demand, Geisst said.

Ohio was one of those states. In the late 1980s and early 1990s, borrowers turned over to cashing companies post-dated checks for the loan amount, paying $ 15 for every $ 100 with an annual interest rate of 391%.

Modern industry was legitimized in 1995, when Ohio lawmakers granted payday lenders an exemption from the state’s 8 percent usury rate cap. There have been a few adjustments since then as loan companies change to comply with updated laws, but the general business model remains the same.

Geisst said the core idea is almost identical to loan sharks 100 years ago.

“Legal jargon can be more sophisticated because of course times have changed, but that’s basically it,” he said.

Mayer pointed out that what was considered a high annual interest rate until the mid-20th century pales in comparison to the rates borrowers see today.

The Pew Charitable Trust found that borrowers in Ohio pay an average of 591% APR, the highest rate in the country. Borrowers know how to repay high interest loans under the threat of lawsuit and financial ruin.

So does that make short-term lenders moneylenders? If it’s just based on the definition of the sentence, yes. After all, there is nothing in the definition that explicitly says that loan sharking is illegal.

“Loanshark sometimes has the added connotation of illegality, but not always,” Fleming wrote.

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