Kesha Warren needed a short-term cash infusion of $1,250 to make payroll costs for her small janitorial services company.
In 2019, she took out an auto title loan, a short-term loan that uses the borrower’s vehicle as collateral.
She says she was shut off from more traditional bank loans.
“No one wants to lend to someone that has $100,000 in student loans, so it was very hard for me to get a traditional loan,” Warren said.
The loan came with a yearly interest rate of 197%. That ballooned her initial $1,250 loan into a total payment of $3,400 that she paid off early last week. Had she not done that, it could have cost her another $2,000.
It’s a story that plays out constantly in Black and Latino communities.
South Side state Sen. Jacqueline Collins co-sponsored the Illinois Predatory Lending Prevention Act, which would cap annual interest rates on short-term loans at 36%.
“Anything above 36% is predatory and usury,” Collins said. “So we know that high-cost payday loans and auto loans have stripped communities of billions and billions of dollars, primarily the Black and Brown communities in the state of Illinois.”
The bill would impact payday loans — typically a two-week loan in which the money is taken from the borrower’s next paycheck. It would also impact auto title loans and other short-term lending products.
Steve Brubaker, who lobbies state government on behalf of the Illinois Small Loan Association, says the 36% ceiling rate in the bill will effectively put most payday and auto title stores out of business, while cutting off a lifeline for borrowers with poor credit.
“We’re closing these stores, we’re firing the people, we’re not providing customers any options, and we’re taking a billion dollars out of the marketplace which was used to fix your car, buy a new refrigerator, spend it on kids clothes for school,” Brubaker said.
The average APR for an auto title loan in Illinois is 197%, according to statistics from the Illinois Department of Financial and Professional Regulation. The average payday loan rate is 297%.
But Brubaker says the numbers are misleading. When measuring the typical two-week length of the loan, it comes out to about $15 on the hundred.
“When they see that giant number they misunderstand what the customer has to pay back,” Brubaker said. “The average loan amount for a payday loan in 2019 was $340. And the average fee amount was $52.”
Brent Adams is vice president at the Woodstock Institute, a nonprofit that advocates on behalf of low-income communities and communities of color. He says the payday lending industry relies on hooking borrowers into a never-ending cycle of debt with hidden rollover fees.
“The business model is to keep the consumer in the loan, so when the bill comes due, the lender will offer an option to roll over the loan, refinance it, take out a different loan, a whole number of options,” Adams said.
Gov. J.B. Pritzker is expected to sign the legislation, but the issue might not end there.
Opponents of the payday lending industry say they’re worried about a series of bills circulating in the General Assembly right now that they say would gut some of the protections that are in the bill awaiting the governor’s signature.
State Sen. Sue Rezin is a sponsor of one such bill in the Senate, SB2306, which she says would protect consumers while still providing them with access to loan options.
“Senate Bill 2306 offers a simple change to the Predatory Loan Prevention Act that would continue to allow mainstream financial institutions to offer convenient, well-regulated auto loans to Illinois consumers through Illinois’ auto dealerships,” Rezin said in a statement emailed to WTTW News. “Consumer protection for Illinoisans is critical, which is why my bill strikes a balance between protecting Illinois consumers and ensuring safe access to automobile credit. Under this legislation, interest rate caps are still in place to protect consumers from predatory lenders. I look forward to working with all parties to address their specific concerns as we move forward with this legislation.”
State Rep. John Carroll, who sponsored a similar bill in the House of Representatives, declined to be interviewed.
Brubaker says he believes the 36% rate cap will have the unintended consequence of pushing borrowers to even more dangerous and unregulated loan products online.
But Collins says credit unions and community banks can pick up the slack, and that ending predatory lending helps chip away at systemic racism.
“Unless we actually contend with these policies and institutional barriers, we’ll always be confronted with policies that preserve inequality,” Collins said.
Pritzker has until early next month to decide what to do with the bill. In a statement, the governor’s office said:
“The Governor is still reviewing the bill, but shares the sponsors’ concerns that predatory lending disproportionately impacts communities of color who don’t have equitable access to traditional banking.”
Note: This story was originally published March 9, 2021. It has been updated.
Follow Paris Schutz on Twitter: @paschutz