Illinois governor signs off on law that caps consumer loan rates at 36%

Illinois Governor J.B. Pritzker on Tuesday signed a bill into law that will cap rates at 36% on consumer loans, including payday and car title loans.

The Illinois General Assembly passed the legislation, the Predatory Loan Prevention Act, in January, but the bill has been awaiting the governor's signature to turn it into law.

Introduced by the Illinois Legislative Black Caucus, the newly signed legislation is modelled on the Military Lending Act, a federal law that protects active service members and their dependents through a range of safeguards, including capping interest rates on most consumer loans at 36%. 

"The Predatory Loan Prevention Act will substantially restrict any entity from making usurious loans to consumers in Illinois," Pritzker said Tuesday. "This reform offers substantial protections to the low-income communities so often targeted by these predatory exchanges." 

With its passage, Illinois is now one of 18 states, along with Washington D.C., that impose a 36% rate cap on payday loan interest rates and fees, according to the Center for Responsible Lending.

Prior to the legislation, the average annual percentage rate (APR) for a payday loan in Illinois was 297%, while auto title loans averaged APRs of about 179%, according to the Woodstock Institute, an organization that was part of a coalition formed in support of the legislation. Illinois residents pay $500 million a year in payday and title loan fees, the fourth highest rate in the U.S., the Woodstock Institute calculated.

"Hundreds of community groups, civil rights organizations, faith leaders and others joined the Legislative Black Caucus in pushing for the historic reform," Lisa Stifler, director of state policy at the CRL said in a statement Tuesday. "As the bill becomes law, Illinois joins the strong trend across the nation toward passing rate caps to stop predatory lending."

But some organizations, including the Illinois Small Loan Association, have already expressed concern with the broad nature of the bill and its potential to completely eliminate access to small consumer loans within the state.

Steve Brubaker, who lobbies for the organization, told a local Chicago news station that the high APRs can be misleading since the average fee (including interest) for a typical two-week payday loan comes out to about $15 for each $100 borrowed.

The Online Lenders Alliance said Tuesday that it was disappointed Governor Pritzker had signed the legislation, saying it was a "bad bill" for residents of the state of Illinois.

"Now is not the time to reduce credit access. Consumers in Illinois are struggling, and elected officials should be working to ensure that all consumers have options to deal with unforeseen or irregular expenses. Sadly, this bill eliminates many of those options for those who need them most," Mary Jackson, CEO of the alliance, said Tuesday.

Still, advocates of the bill say it can help limit predatory lending. More than 200 million Americans still live in states that allow payday lending without heavy restrictions, according to CRL. And these loans are easy to obtain. Typically, consumers simply need to walk into a lender with a valid ID, proof of income and a bank account to get a payday loan. The balance of these types of loans are usually due two weeks later.

Yet the high interest rates and short turnaround can make these loans expensive and difficult to pay off. Research conducted by the Consumer Financial Protection Bureau found that nearly 1 in 4 payday loans are reborrowed nine times or more. Plus, it takes borrowers roughly five months to pay off the loans and costs them an average of $520 in finance charges, The Pew Charitable Trusts reports. That's on top of the amount of the original loan.

Communities of color, in particular, are targeted by these types of high-cost loans, CRL reports. "As Covid continues to ravage these communities, an end to predatory debt traps is essential," Stifler says. "We must also pass federal reforms, to protect these state caps and expand protections across the country." 

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