When Does a Lender Become a Loan Shark?

At what point does a lender (good) become a loan shark (bad)? The question has exercised philosophers—and unhappy borrowers—from antiquity to the present. In Loan Sharks: The Birth of Predatory Lending, finance professor Charles Geisst recounts the debate in the U.S. from the late 19th century through the Great Depression. The history illuminates today’s debates over, say, what the Consumer Financial Protection Bureau should do to control payday lenders, though Geisst is shy about drawing conclusions that might be useful to policymakers.

Loan sharks thrive where traditional banking is absent. They fill an unmet need, albeit often in a heartless, exploitative way. But one thing you’ll learn from the book is that there’s never been consensus on what’s a fair limit for interest rates. “In Rome it was 12 percent, in Elizabethan England 6 percent, and in the United States, it has ranged from 6 percent to 40 percent,” Geisst writes. That said, a few principles seem to have been widely accepted over the decades. One: It’s fair to charge higher rates for riskier loans. Two: It’s less fair in cases where the borrower is judgmentally impaired or uninformed—say, a recent immigrant who may not understand what the words “floating interest rate” mean.