Hold on, Illinois, and cap interest rates at 36% on payday loans | Editorial

Six years ago, a Downstate Springfield woman, Billie Aschmeller, took out a short-term loan of $596 that carried an insane annual interest rate of 304%. Even if she repaid the loan within the two years required by her lender, her total bill would exceed $3,000.

Before long, however, Aschmeller was falling behind on other basic expenses, desperately trying to keep up with the loan so as not to lose the title to his car. Eventually, she ended up living in that car.

Aschmeller regrets going the payday loan and car title route, with its high interest rates, although his intentions – to buy a winter coat, a crib and a car seat for his pregnant daughter – were understandable. She is now a vocal advocate in Illinois for the crackdown on a small, short-term loan industry that, by any measure, has left millions of Americans like her only poorer and more desperate.

For years, as she told the Legislative Assembly, she felt “like a hamster on one of those wheels.”

A bill awaiting Governor JB Pritzker’s signature, the Illinois Predatory Loan Prevention Act, would go a long way to ending this kind of exploitation by the financial services industry, and the governor will no doubt sign it into law. The bill, which would cap interest rates at 36%, has strong bipartisan support. It was approved unanimously in the House and 35 to 9 in the Senate.

But two hostile trailer bills – HB 3192 and SB 2306 – have been introduced in the Legislature that would significantly weaken the Predatory Lending Prevention Act, defeating much of its purpose. We hope that these two bills will go nowhere. They would create a loophole in the way the annual percentage rate is calculated, allowing lenders to charge hidden additional fees.

Between 2012 and 2019, as recently reported by the Chicago Reader, more than 1.3 million consumers took out more than 8.6 million payday, car title and installment loans, for an average of more than six loans per consumer. These loans typically ranged from a few hundred dollars to a few thousand dollars and carried average annual interest rates — or APR — of 179% for car title loans and 297% for payday loans.

Some 40% of Illinois borrowers — a disturbing percentage that underscores the unreasonableness of the charge — end up defaulting on those loans. More often than not, they find themselves caught in a cycle of debt, with old loans turning into new ones. At the national level, the The Consumer Financial Protection Bureau discovered nearly one in four payday loans are re-borrowed nine or more times.

Studies have shown that payday loan borrowers often fall behind on paying other bills, delay spending on medical care and prescription drugs, and go bankrupt. They are also very often people of color. Seventy-two percent of Chicago’s payday loans come from black and brown neighborhoods.

The Predatory Loan Prevention Act, an initiative by the increasingly assertive Legislative Black Caucus, would cap interest rates for consumer loans under $40,000 — such as payday loans, installment loans and auto title loans – at 36%. This is the same interest rate cap imposed by the US Department of Defense for loans to serving military members and their families.

Critics of the bill, i.e. lenders and their associations, insist that they only provide reasonable service to people who are in the most difficult situation, who desperately need money and have nowhere to go. No bank or credit union, the lenders point out, would lend to such high-risk customers.

But in states where triple-digit interest rates on payday loans and auto title loans have been banned, studies have shown people are turning to other — and better — alternatives. They use their credit cards, which have lower interest rates. They ask family and friends for help. They accumulate more savings. And apparently above all, they have reduced expenses.

There are also nonprofit institutional lenders in Illinois, such as Capital Good Fund and Self-Help Federal Credit Union, willing to provide small loans at rates below 36%.

Seventeen states and the District of Columbia have already capped interest rates at 36% or less on payday loans and auto securities. In the service of greater racial equity – and to strike a blow at structural racism, which is really what it is – Illinois should do the same.

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