Illinois should cap interest rates on payday loans at 36%

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

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

Aschmeller regrets she ever went the payday and car title loan route, with its usury-high levels of interest, though her intentions — to buy a winter coat, crib and car seat for her pregnant daughter — were understandable. She is now an outspoken advocate in Illinois for cracking down on a short-term small loan industry that, by any measure, has left millions of Americans like her only poorer and more desperate.

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

A bill awaiting Gov. J.B. Pritzker’s signature, the Illinois Predatory Loan Prevention Act, would go a long way toward ending this sort of exploitation by the financial services industry, and there’s little doubt the governor will, in fact, sign it. 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 greatly water down the Predatory Loan Prevention Act, defeating much of its purpose. Our hope is that those two bills go nowhere. They would create a loophole in how the annual percentage rate is calculated, allowing lenders to charge hidden add-on fees.

Between 2012 and 2019, as reported recently 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. Those loans typically ranged from a few hundred dollars to a few thousand, and they carried average annual interest rates — or APRs — of 179% for car title loans and 297% for payday loans.

Some 40% of borrowers in Illinois — a disturbingly high percentage that underlines the unreasonableness of the burden — ultimately default on repaying such loans. More often than not, they find themselves caught in a cycle of debt, with old loans rolling over into new ones. Nationally, the Consumer Financial Protection Bureau has found, nearly 1 in 4 payday loans are reborrowed nine times or more.

Studies have shown that payday loan borrowers frequently fall behind in paying other bills, delay spending for medical care and prescription drugs and go bankrupt. They also very often are people of color. Seventy-two percent of Chicago’s payday loans originate in Black and Brown neighborhoods.

The Predatory Loan Prevention Act, an initiative of 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%. It is the same interest rate cap imposed by the U.S. Department of Defense for loans to active members of the military and their families.

Critics of the bill, which is to say lenders and their associations, insist they are only providing a reasonable service for people who find themselves in the toughest straits, desperate for cash and having nowhere else to turn. No bank or credit union, the lenders point out, would extend loans to such high-risk customers.

But in states where triple-digit interest rates on payday and auto title loans have been outlawed, studies have shown that people do turn to other — and better — alternatives. They use their credit cards, which have lower interest rates. They seek help from family and friends. They build up more savings. And apparently most of all, they cut back on expenses.

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

Seventeen states and the District of Columbia already have capped interest rates at 36% or lower on payday and auto title loans. In the service of greater racial equity — and to strike a blow against structural racism, which is really what this is all about — Illinois should do the same.

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