Illinois Governor JB Pritzker signed a bill Tuesday that capped interest rates on consumer loans, including payday and auto title loans, to 36%.
The Illinois General Assembly passed the law the Prevention of Robbery Loans, in January, but the law is awaiting the governor’s signature to enact it.
The newly signed law was introduced by the Illinois Legislature Black Caucus and is based on the Military Credit Act, a federal law that protects active service members and their dependents through a number of safeguards, including capping interest rates on most consumer loans at 36%.
“The Predatory Loan Prevention Act will significantly prevent any facility from lending usury to consumers in Illinois.” Pritzker said Tuesday. “This reform offers significant protection to the low-income communities so often hit by these predatory exchanges.”
With its passage, Illinois is now one of 18 states, along with Washington DC, that mandate an interest rate cap of 36% on interest rates and fees on payday loans, according to the Center for Responsible Lending.
Prior to the legislation, the average annual interest rate (APR) on a payday loan in Illinois was 297%, while auto title loans had average annual percentage rates of about 179%. according to the Woodstock Institute, an organization that was part of a coalition formed to support legislation. Illinois residents pay $ 500 million per year in payday and title loan fees, the fourth highest rate in the US, calculated the Woodstock Institute.
“Hundreds of community groups, civil rights organizations, religious leaders and others joined the Legislative Black Caucus to push for historic reform,” said Lisa Stifler, director of state policy at the CRL, in a statement Tuesday. “When the law becomes law, Illinois will join a strong trend across the country to pass interest rate caps to stop predatory loans.”
But some organizations, including the Illinois Small Loan Association, have already expressed concern about the broad nature of the bill and its potential to completely eliminate access to small consumer credit within the state.
Steve Brubaker, who is committed to the organization, told a local Chicago news station that the high APR can be misleading as the average fee (including interest) for a typical two-week payday loan is around $ 15 per $ 100.
The Online Lenders Alliance said Tuesday it was disappointed that Governor Pritzker signed the law and said it was a “bad bill” for Illinois state residents.
“Now is not the time to reduce access to credit. Illinois consumers are struggling, and elected officials should work to ensure that all consumers have options to deal with unforeseen or irregular expenses. Unfortunately, this bill eliminates many of those options for those who need those who need them most, “said Mary Jackson, Allianz CEO, on Tuesday.
Still, proponents of the bill say it can help curb predatory lending. According to the CRL, more than 200 million Americans still live in states that allow payday loans with no severe restrictions. And these loans are easy to come by. Typically, consumers only need to go to a lender with a valid ID, proof of income, and bank account to get a payday loan. The balance of this type of loan is usually due two weeks later.
However, the high interest rates and short term can make these loans expensive and difficult to pay off. Research carried out by the The Consumer Financial Protection Bureau has found that almost 1 in 4 payday loans borrowed nine or more times. Also, it takes borrowers about five months to pay off the loans and costs them an average of $ 520 in financing costs The Pew Charitable Trusts reported. That is in addition to the amount of the original loan.
CRL reports that these types of expensive loans are primarily aimed at color communities. “As Covid continues to devastate these communities, an end to the predatory debt traps is imperative,” says Stifler. “We also need to pass federal reforms to protect these state caps and expand protection across the country.”
Check out: Use this calculator to see exactly how much your third coronavirus stimulus check could be worth
Do not miss: Payday loans can have interest rates in excess of 600% – here is the typical interest rate in any US state