Where do I look for a good loan? Is this a convenient rate? How to know if someone is a reliable lender or a scammer? In South Africa, as in every country in the world, financial institutions coexist with unreliable companies or persons. As always, to avoid falling in the wrong place, financial literacy is the key.

When we speak about asking for a credit, the market is full of options: traditional banks, family borrowing, online loans, etc. There also exist individual lenders that usually offer their services in areas where financial access is limited. They’re known as loan sharks and their “core business” is related to borrowing money from people through their neighborhoods, for example.

According to the Solidarity Movement, it is estimated that 40,000 loan sharks operate in South Africa.

The key to identifying loan sharks is the fact that they are not registered lenders, which means that most of them operate illegally as the credit market is a regulated activity. One of the consequences of non being registered is that these people, at least, don’t conform to lending rules. The money to repay turns into hard-to-meet fees as loan conditions use to be abusive with extremely high interest rates: these lenders charge between 30 and 50 percent in interest rates, meanwhile the highest legal rates can just get to 3% on loans under six months.

However, the mentioned conditions aren’t the hardest part of loan sharks. They are actually dangerous when it comes to the collection process. As they can’t, for obvious reasons, use the legal system to collect the debts, their enforcing repayment strategies are related to threats (and use) of violence or humiliation.

Let’s keep informed to spot a loan shark

As always, education helps to prevent risks and abuses. Unfortunately, South Africans’ financial literacy remains low. In this respect, being aware about rules, and the do’s and don’ts in personal loans could be the first step.

 So, here are some microlending rules that a regular lender should respect:

• Companies or individuals that operate as lenders must show a register number.
• A loan maximum term can be 36 months (3 years).
• R10,000 is the highest amount that can be borrowed.
• Quote payments through other debts are forbidden.
• Before offering a loan, established lenders perform an affordability assessment to check if the potential debtor is capable of paying bay.

In contrast, there are several red flags used to identify potential loan sharks. First of all, as their operations are irregular, generally they don’t have websites or company registration credentials, and their loans aren’t registered by a contract and there’s no way to track the repayments. At the same time, these illegal lenders also use illegal -and unusual- security strategies like taking your passport, bank card or any license until the loan is fully repaid.

When it comes to loan conditions, loan sharks avoid clarifying the interest rates or fees before closing the deal, and often change their rules or add extra fees without notices.