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Old 04-22-2004, 04:43 PM
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Loan Sharks and Interest Rates

Can someone explain how loan sharks' interest rates work? My only knowledge of this is the movies and I would like to understand what they are talking about? What is a vig (sp?)? What does it mean when they say their is a 20 point vig and you pay the principle before the interest?
Old 04-22-2004, 05:40 PM
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Fist off, a point is 1% of the principle amount. So this guy is supposedly charging 20% of the principle amount. That is plausible, since if you were borrowing $10,000 you would owe mr shark $10,000 plus $2,000 in interest. However, usually if you fail to pay on time, the points you owe are tacked onto the amount and the points you owe are now recalculated based on the new amount.

Example; above you owed $12,000 and you didn't pay, well, now you owe $12,000 plus $2400 in new interest. That brings the amount you owe to $14,400.
You can see why this is a business Mr. Shark got into.

Why they said you pay the principle before the interest, I don't know. Maybe the writers wanted to use those fancy words to make the sharkster look like he knew something about finance. But in the finance industry, you pay the interest first... this way the bank makes its money early, so if you pay off early, they get the interest plus the principle.
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Old 04-22-2004, 06:00 PM
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and "vig" is short for...


vig·o·rish

NOUN: Slang 1a. A charge taken on bets, as by a bookie or gambling establishment. b. The rate or amount of such a charge. 2. Interest, especially excessive interest, paid to a moneylender.

ETYMOLOGY: Yiddish slang, from Russian vyigrysh, winnings : vy-, out; see ud- in Appendix I + igrat', to play.


From the American Heritage online dictionary
Old 04-22-2004, 06:22 PM
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But loan sharking is not the financial industry. The reason they would take back the principle first is that as soon as it is paid off - they have all their money back. They're not interested in long-term returns.

Loan sharking interest is also geared to quick returns. That's why the percentage compounds weekly instead of yearly. At 20% interest a week, you can get immediately in over your head if you don't pay the money back on time. That's why nobody goes to a loan shark except out of utter desperation. Or stupidity.
Old 04-22-2004, 07:43 PM
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Would a loan shark pay income tax? What would his accountant recommend?
Old 04-22-2004, 07:58 PM
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Money earned by illegal activities is taxable and has to be declared on your tax return. Of course, you could just call it "business income," and you'd be in the clear from a tax point of view.
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