Loan Sharks

December 8, 2011
Posted by Jay Livingston

Back when I knew about such things, a typical arrangement with a loan shark was the standard $100 knock-down loan.  The shylock gave you $100; you paid him back $20 a week for six weeks.  It works out to something like 175% interest a year, maybe more since in the sixth week you’re paying $20 vig even though you’ve paid off the $100 principle. I think Sudhir Vankatesh found that Chicago loansharks were offering more extended payback periods, hence a lower rate.   Still, when you consider that usury laws used to set the limit at less than 50%, 175% a year looks pretty steep.

I’m an upstanding professor, and I do not deal with loan sharks.  Instead, I have a credit card with a highly respectable bank, J.P. Morgan Chase. Last month, I must have missed their e-mail alerting me to my bill, and I didn’t pay it. It was only $175. How much could my neglect possibly cost me?  I mean, after all, I wasn’t dealing with some mobbed-up shylock. This was JP Morgan. 

Here is what my bill for this month looks like.

In effect, the bank was lending me the $175 for a month.  In return, they charged me $2.66 interest plus a $25 fee.  That works out to nearly 190% a year. 

In the great bank bailout, JP Morgan got  about $25 billion (or was it $50 billion?) in government money.  I don’t know the details of the deal. I don’t know what interest rate they settled on. But in my bill-induced reverie, I imagine Treasury Secretary Hank Paulson saying to Jamie Dimon, “You got a nice bank here, and I’d hate to see it go under.  So what do you say I fix you up with a $25 billion knockdown loan?  Only 175%. By your standards, that’s a bargain.”


Bob S. said...


Why are you doing business with Chase then?

Surely this contract, including late fees, doesn't come as a surprise to you right?

Or is this a "Hey I didn't think you would really charge me what you said you were going to charge me when I signed on the dotted line" type post?

PCM said...

No. It's a big business gets to legally do what is criminalized for other people because big business gives money to politicians who makes the laws post.

At least why not open the market up so your local loanshark could undercut 190% interest?

Reminds me of the lottery. When I was a kid, lotteries were illegal. Than the state took it over and gives much worse odds than your local numbers man ever did. It's still criminal when he does it.

Jay Livingston said...

Peter, Remember when state lotteries came in? States like NY claimed that they didn’t want to encourage gambling, oh no, but since people were going to play the numbers, it would be better for the action to go to the state rather than to the bad guys. Now you can’t turn on the TV or watch a bus go by without being encouraged to gamble on the dozens of new games that have proliferated.

PCM said...

And I just checked my credit card to make sure it's paid up. Thanks for the reminder.

albina N muro said...

I think Sudhir Vankatesh found that Chicago loansharks were offering more extended payback periods, hence a lower rate. Get Some Dosh

Anna Schafer said...
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