Where banks fail to serve a community, an opening is afforded for private persons to perform some of their functions. Certain pathological conditions in society may also occasion and maintain the activity of such persons, even against the efforts of banks to serve the particular need and against the efforts of reformers to eradicate what is usually an evil. One such person is the "loan shark," who specializes in personal loans.
"Loan shark" is the popular designation of a person who makes it a business to exploit, by charging extortionate interest, the real or fancied financial needs of individuals who have no other resource which they are willing or able to utilize. These professional money-lenders are of several types: (1) The chattel loan-broker is one who takes as security mortgages on furniture, household effects, or other personalty of the borrower; these mortgages are skilfully drawn to protect the creditor both as against the usury law and against default of the borrower. (2) The salary loan-broker is one who takes as security an assignment of the wages of the borrower; as a variation, he sometimes purchases the salary so as to evade the usury law. (3) The pawnbroker is one who purchases personal property from the needy at a low price and enters an agreement to resell it to the borrower within a specified time at a specified higher price. The resale price rises fast in case prices are specified for several dates, the difference between the purchase price and the resale price always constituting a high rate of interest. Legally speaking, however, the transaction is a contract of sale and not of loan and the usury laws are thus evaded, the borrower being free to buy back the article if he chooses. There are other types and variations of these money-lending methods. Some brokers employ all three methods mentioned above and others in addition.
The business is highly questionable in character and is done under cover of secrecy and confidence. The want of publicity makes it particularly difficult to obtain accurate statistics of the number of loan-brokers and the volume of their business. The director of the Division of Remedial Loans of the Russell Sage Foundation in 1911 stated, as his conclusions from extensive investigations, that in cities of 30,000 people or more one usurer would be found to every 5,000 or 10,000 people, and that about 5 per cent of the population borrowed. In 1911 an investigation in Chicago found 239 firms operating, with an average business estimated at $85,000 each a year, or nearly $11,000,000 for the one city.
The interest rates charged are extortionate. In Pittsburgh, in 1909, they were found to range "from 40 per cent in a very few cases to about 120 per cent in most, and in the case of the so-called 'renewal' loans, to as high as several hundred per cent." The business is therefore highly lucrative. The brokers have perfected very reprehensible ways of collecting illegal charges and skilful processes for evading the usury law. The high rates are more than enough to cover the alleged high risks, for the lender amply protects himself in various ways: The amount of the loan is usually small and within the earning possibilities of the borrower; loans on assignment of wages are more freely made to employees of firms which forbid their employees to borrow from money-brokers in this way, because the brokers are then put in a strategic position to extort payment under threat of exposure; sometimes bills of sale of salary are used to evade the usury law; often several indorsers are required and their salaries jointly assigned; and the great desire of the borrowers to keep the loan confidential gives the broker a lever for intimidation at the time for collection.
In order to conceal their true character, the loan sharks operate under various designations. They are ostensibly real estate dealers, coal dealers, lawyers, bankers, tailors, etc. Only 18 of the 239 in Chicago were found to be incorporated, and of the charters granted 8 had been canceled for failure to make reports to the state. None of those incorporated had charter powers to engage in lending money. Among the loan sharks it is not deemed wise to incorporate, for a change of name is necessary at frequent intervals to bury their unsavory past.
The money-brokers get business by advertising in the city papers, by circularizing the public with hand-passed bills, by personal solicitation, by having indebted customers act as agents on commission basis, and by exchange of names of old, disgruntled customers. In collecting they prey upon the borrower's ignorance of his legal rights, of his means of redress, and of the nature of the obligations he has signed. To this end the brokers use an elaborate set of legal or apparently legal papers that confuse the borrower and give the advantage to the creditor; they rely more upon bluff and intimidation and threats than upon legal security. In Chicago the money-brokers, for the purpose of getting the credit record and responsibility of applicants, maintain a very secret central credit clearing house which is highly organized and which is an efficient and valuable protection against weak borrowers.