Governor JB Pritzker signed the Illinois Predatory Lending Prevention Act late last month, which caps annual interest rates on short-term loans at 36%.
The law, which took effect immediately, has an impact on payday loans – typically a two-week loan in which the money is taken from the borrower’s next paycheck. It also has an impact on auto title lending and other short-term loan products.
“Anything over 36% is predatory and wear and tear,” said State Senator Jacqueline Collins, who co-sponsored the measure. “So we know that high-cost payday loans and auto loans have robbed communities of billions and billions of dollars, primarily black and brown communities in the state of Illinois.”
Kesha Warren knows the high cost firsthand. When she needed a short-term cash injection of $ 1,250 to cover the wage costs of her small janitorial services business in 2019, she took out an auto title loan, a short-term loan that uses the borrower’s vehicle as collateral.
She says she has been left out of more traditional bank loans.
“No one wants to lend to someone who has $ 100,000 in student loans, so it was very difficult for me to get a traditional loan,” Warren said.
The loan carried an annual interest rate of 197%. This inflated her original loan by $ 1,250 into a total payment of $ 3,400 which she repaid earlier this year. If she hadn’t, it could have cost her an additional $ 2,000.
But Steve Brubaker, who is lobbying the state government on behalf of the Illinois Small Loans Association, says the statutory 36% rate cap will effectively put most payday and auto title stores out of business, while cutting a lifeline for borrowers with poor credit.
“We are closing these stores, we are laying people off, we are not giving customers any options and we are taking a billion dollars out of the market that was used to fix your car, buy a new refrigerator, spend on children’s clothes for. school, ”Brubaker said.
The average APR for an auto title loan in Illinois is 197%, according to statistics from the Illinois Department of Financial and Professional Regulation. The average rate for payday loans is 297%.
But Brubaker says the numbers are misleading. When you measure the typical two-week loan term, it comes down to about $ 15 per cent.
“When they see this giant figure, they misunderstand what the customer has to pay back,” Brubaker said. “The average payday loan amount in 2019 was $ 340. And the average fee amount was $ 52.
Brent Adams is Vice President of the Woodstock Institute, a non-profit organization that advocates on behalf of low-income communities and communities of color. He says the payday loan industry relies on inserting borrowers into a never-ending cycle of debt with hidden running costs.
“The business model is to keep the consumer on the loan, so when the bill comes due, the lender will offer an option to roll over the loan, refinance it, take out a different loan, a number of options,” Adams said. . .
“It’s seen as an opportunity to be able to meet needs, but in reality it’s (to enter) a cycle of debt,” said Lizette Carretero, head of financial well-being at the resurrection project. “We see it mostly in communities of color, we see it in households earning less than $ 25,000 a year.”
Even if Pritzker signed the legislation, the problem might not end there.
Opponents of the payday loan industry say they are concerned about a series of bills currently circulating in the General Assembly. They say these bills would take away some of the protections in the new law.
State Senator Sue Rezin is a sponsor of one of these bills in the Senate, SB2306, which she said would protect consumers while giving them access to lending options.
Senate Bill 2306 proposes a straightforward amendment to the Predatory Loan Prevention Act that would continue to allow traditional financial institutions to offer convenient and well-regulated auto loans to consumers in Illinois through Illinois auto dealers, ”Rezin said in an emailed statement to WTTW News. .
“Protecting Illinois consumers is essential, which is why my bill strikes a balance between protecting Illinois consumers and ensuring secure access to auto credit. Under this legislation, interest rate caps are still in place to protect consumers from predatory lenders. I look forward to working with all parties to address their specific concerns as we move forward with this bill. “
State Representative John Carroll, who sponsored a similar bill in the House of Representatives, declined to be interviewed.
Brubaker says he believes the 36% rate cap will unintentionally push borrowers into even more dangerous and unregulated online lending products.
But Collins says credit unions and community banks can pick up the slack, and ending predatory lending helps eliminate systemic racism.
“Unless we really face these policies and institutional barriers, we will always face policies that preserve inequalities,” Collins said.
The Resurrection Project Carretero agrees. “We understand that people (enter) these programs because of credit issues. We strive to work with credit unions, community banks, second chance products from real institutions that allow you to get back into the financial sector and seek opportunities to create a better financial journey, ”he said. she declared.