“Closed.” This sign is nothing new in the past 18 months.
Thanks to the coronavirus pandemic, sales plummeted at many retailers, doors were closed and employees made redundant.
But across Illinois, state law passed earlier this year has caused hundreds of certain types of businesses to close, including at least one in Evanston. And that is exactly what many legislators and consumer advocates wanted to achieve.
The companies in question offered payday loans and other short-term, high-yielding loans that critics argued would keep borrowers trapped in a never-ending debt cycle. You can’t pay back everything, say these reviewers, so customers end up borrowing even more.
The term “payday loan” refers to the usual length of the loan, around two weeks, the time between paydays for many borrowers. Payday loans require full repayment on the due date, plus the borrowing fee. There are also short term loans, where a borrower’s car title is held as collateral, and short term installment loans that allow repayment over a longer period of time than payday loans.
Borrowed amounts typically range from a few hundred to a few thousand dollars for customers who often have “subprime” credit, making them unlikely to be dealt with by a bank.
Suburban South Holland Kesha Warren says she borrowed $ 1,250 on a car title to keep her business going, but in the end she owed not only the principal but also $ 4,200 in interest and fees, such as a video trust produced by the Chicago community, an organization that favors interest caps on such loans.
Charla Rios, a researcher with a nationwide group, the Center for Responsible Lending, says that payday loans and other similar tools “do a lot more harm than good.”
Before Illinois passed its Predatory Loan Prevention Act, payday and other short-term loans could reach 404% of the annual interest rate. The new law limits these rates to 36% APR, consistent with similar laws in 17 other states and the District of Columbia.
In fact, according to the US News & World Report, 36% is more than double what someone with poor credit would pay for a car loan, although car loans are typically for much larger loan amounts with longer repayment periods.
In addition to affecting payday and auto title loans, the Illinois Interest Rate Cap Act also affects installment loans from online lenders.
The statewide organization that represents online lenders says Illinois law is actually hurting consumers because fewer credit options are available to those who may not qualify for money from a bank, savings bank, or credit union.
Andrew Duke, Executive Director of the Online Lenders Alliance, calls the law “a solution to a problem.”
A federal consumer agency, he says, saw only 1% of complaints from the public relating to personal loans in 2020.
“This data,” says Duke, “means that customers, by and large, have no problems with small loan products.”
“Rate caps,” adds Duke, “don’t lower borrowing costs, but rather reduce access to credit.”
Lenders also say that the focus on the APR can be misleading because while 300-400% is the annual rate and may sound extremely high, the actual amount repaid for a small loan is relatively small if the loan is repaid on time. Before the new Illinois law went into effect, the $ 100 loan fee was $ 15.50 for a two-week loan.
But proponents of the law say borrowers often miss the due date, the loan is extended, and the customer is buried in ever increasing debt. Or the customer pays back the loan on time and then borrows again a few weeks later.
Brent Adams of the Illinois-based Woodstock Institute, a liberal policy study group, says borrowers initially feel like they can repay $ 500 on time, for example.
But, he says, “research shows that a trap is more common than not” because the borrower cannot meet the due date and needs to extend the loan, “and buy more time with a new fee. The average borrower of a payday loan, “says Adams,” turns the loan around a lot “
Duke of the online lenders group says that low-dollar short-term loans can be a far better alternative to missing bills, piling up credit card debt, or even filing for bankruptcy.
As credit drops, Duke says, “other harmful options go up.”
He says the Illinois interest rate cap will force many online lenders to stop doing business here because it would be impossible to make a profit.
“I suspect there has been a pretty substantial pullback,” he says.
However, critics say that high interest rates on such loans can cause exactly the same problems, such as missing other payments or getting to the bankruptcy court.
One of the driving forces behind Illinois law was the Black Legislative Caucus.
Adams, of the Woodstock Institute, says payday loan businesses are typically in low-income minority neighborhoods.
According to the state of Illinois, more than half of short-term, high-yield borrowers made less than $ 30,000 a year in the 2012-2019 period. The transaction value at that time was nearly $ 7 billion.
“These products,” says Adams, “target black and brown communities with almost surgical precision.”
Although Evanston has a sizable population of all races, it is primarily an affluent community with less appeal to stationary payday loan businesses, even before new Illinois law.
In fact, nine years ago Evanston City Council restricted the location of payday loan businesses to a handful of businesses. The three stores at the time did not have to move, but new ones would have been limited to the few locations.
Evanston has several financial education programs for consumers who want to learn how to better manage money, or perhaps lack of money.
The city plans to renew a program with the First Northern Credit Union that has been suspended due to the coronavirus pandemic. The local YWCA as well as Wintrust and Byline banks also have similar offers.
The Interest Rate Cap Act has had a dramatic impact on the short-term lending business in Illinois. A government study found that at the end of 2019 there were 1,578 licensees offering short-term loans of various types and lengths.
Woodstock Group’s Adams said 75% of them had closed last July.
And Evanston, it seems, may not have any more. A search on Google Maps reveals that most of what was previously listed as payday loan deals is gone.
And perhaps the last one, 1828 Dempster, is also empty. An employee at the check cashing store next door told Evanston Now that the payday loan shop closed four to six months ago, not long after the Illinois interest rate cap went into effect.