Don’t Fall Prey to Loan Sharks

Warning: Don’t fall prey to loan sharks!

Loan sharks are entities that charge very high interest rates but often tell you a small percentage rate, hiding the fact that the stated rate is a monthly interest rate and not the yearly rate. The annual interest rate is obtained by multiplying the stated rate by 12 months. The stated rate may be 1% but is often 3%, which seems like a low interest rate. However, this is charged monthly, making the annual rate 12% or 36% (3% × 12=36%) or even more depending on how much the monthly rate is. That is a high interest rate compared to banks which charge 4% to 10% interest per year. 

It’s important to keep this difference in mind and verify whether the given rate is the monthly interest rate or yearly interest rate. Banks usually state the interest rate on a yearly basis. Loan sharks, on the other hand, give the monthly interest rate and hide the yearly rate. They even don’t openly say that the rate they are giving you is the monthly rate but just give the percentage rate, although in contracts it is written that the rate is a monthly rate. And since most people aren’t financially educated, they easily miss this important point when signing the contract!

Thus, with a 3% per month interest rate, a loan of 10,000 will cost you 3,600 annual interest. (Calculated  10,000 × 3% ×12 months.)  A loan of 50,000 will cost you 18000 annual interest. On loan of 100,000, you will have to pay 36,000 interest per year!

If your annual savings are close to the interest amount, you will be paying interest for the rest of your life and never pay off the principal loan amount! And that is the aim of loan sharks, which is why they hide the actual interest rate. They try to trap you. So beware of people who promise to lend you money with “low interest rates!”

Interest is forbidden by God (in Islam as well as other religions) so you should avoid it altogether. It is better to get a small amount of interest-free loan from friends or delay your plans and use only your savings than to destroy your life through loan sharks who only want to take your hard-earned money.


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Posted in advice, Ethics, Finance

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