When people hear the word "loan shark", many imagine a dark underworld and burly mafiosi with menacing faces. As is typical today, however, the underground loan business has transformed into a very different, digital and more systematized ecosystem that operates completely openly on familiar social‑media platforms.

Kristjan Pulk and Laura Inno from the University of Tartu analyzed posts in Estonian Facebook loan groups and interviewed borrowers, lenders, and debt counselors. As expected, collecting data for the study was difficult, as neither side wanted to talk about their activities. The researchers contacted 125 borrowers, of whom only 12 agreed to speak. Out of 24 lenders, five gave interviews. In addition, they spoke with a handful of debt counselors.

During the observation period, the loan market was significant — Estonian loan groups had a total of 45,000 members. The largest group had 14,000 members, but only about 25–30 actively offered loans.

Interviews revealed that most people borrow from social media to cover basic needs, because they can no longer get an appointment with a bank. Lenders often justified their activities on ethical grounds, claiming they provide essential funds to those excluded from the official credit system. Other borrowers were attracted by the quick and easy access to credit, even though the average interest rate reached nearly 600 percent. For comparison, Estonia's legally permitted maximum annual percentage rate for consumer loans is 45 percent.

Interviews also showed that a large share of loans go bad. Some lenders have to write off every third loan. In one extreme case, a full 75 percent of borrowers failed to repay their loans.

How does such a risky and illegal market survive? Through thorough background checks and harsh collection methods. Lenders try to assess borrowers' solvency and identity carefully using photos and bank statements, but the system has gaps. The researchers encountered examples of identity theft and cases where loans were issued to people lacking legal capacity.

When a client is late with a payment, lenders do not initiate official proceedings. Instead, they usually post the debtor's photo and private messages publicly to shame them. The fear of this is so great that people agree to pay the demanded sums. Often borrowers are not even aware that they have no legal obligation to pay usurious fees. Lenders themselves avoid going to court, because official intervention would invalidate their contracts and expose the hidden business.

The researchers published their findings in the journal Trends in Organized Crime.

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