Study: Social media loan market relies on fear of public shame

Scientists at the University of Tartu have conducted a study on an unofficial loan market in Estonian social networks that bypasses state regulation. Researchers Kristjan Pulk and Laura Inno analyzed Facebook groups dedicated to loans and conducted interviews with borrowers, lenders, and debt advisors. Data collection proved difficult as participants were reluctant to speak. Out of 125 borrowers contacted, only 12 agreed to an interview; out of 24 lenders, five participated. A total of 45,000 people were members of such groups; the largest group had 14,000 members, but only 25–30 active lenders.

Most borrowers used social media for loans to cover basic expenses because they could no longer obtain credit from banks. Lenders often justified their activities on ethical grounds, claiming to help those excluded from the official credit system. The average interest rate reached nearly 600%, while the legally permitted maximum total cost of consumer credit in Estonia is around 45%.

A significant portion of loans are not repaid. Some lenders have to write off every third loan they issue. In one extreme case, 75% of borrowers did not repay. This market persists due to thorough borrower screening and harsh collection methods. Lenders assess solvency through photos and bank statements, but there are loopholes: researchers documented cases of identity theft and loans issued to incapacitated individuals.

If a client defaults, lenders do not turn to official authorities but instead publish photos of debtors and personal correspondence on their pages. The fear of public shame is so strong that people agree to pay the demanded amounts, often unaware they have no legal obligation to pay usurious interest. Lenders avoid court because official intervention would void their contracts and expose their hidden activities. The study was published in the journal Trends in Organized Crime.