payday loan application torn with a car key

In support of HB 2685 – SFA 3 and specifically the portion of the bill that establishes a 36% cap on consumer loans in Illinois.

I took an Uber to the train station yesterday. When I told the driver that the average APR on a payday loan was 297%, she nearly swerved into oncoming traffic. For the 15 or so years I have worked on this issue, only in this building are those rates considered normal.

297% is predatory.  179%, the average APR on a title loan, is predatory. 228%, the average APR on an installment payday loan, is predatory. Even the comparably low 99%, which is the cap on small consumer loans of $1500 or less, is predatory.  

On this issue, Illinois is behind the times.

It is a little known fact that it is a felony in Illinois to charge over 20% interest. It’s called criminal usury, but the law was changed in 1985 to let companies exceed the rate if they got a license. In other words, a lower rate applies to loan sharks than applies to Illinois-licensed finance companies. 

For decades, predatory consumer loans have stripped billions predominantly from families of color, trapping them in cycles of debt, making it impossible for them to build wealth, and causing them to forgo other expenses like health care and prescription drugs. According to data from the statewide database of payday loans, you are 13 times more likely to have a payday loan if you live in zip code 60644 in Austin compared to zip code 60614 in Lincoln Park.

On this issue, Illinois is behind the times.

Since 2006, the federal Military Lending Act has protected active duty military across the country with a rate cap of 36%. The Department of Defense had found that predatory loans were a threat to national security because of the stress placed on service members. 17 states and DC have caps of 36% or lower. 

In November over 80% of Nebraska voters approved a cap of 36% on payday loans. Similar majorities established 36% caps in Colorado in 2018 and in South Dakota in 2016. More voters in Nebraska and SD supported the 36% cap than supported President Trump. Even in Illinois, consumer loans of $4000 and above are capped at 36%. You get the idea. It is high time we stop predatory loans and establish a 36% cap on all consumer loans.

Access to credit has always been the industry’s go-to argument. Not all credit is created equal. Some credit, which is just another way of saying debt, can ruin your life. The mortgage crisis was caused by unaffordable credit with predatory terms. In that instance, it caused folks, disproportionately high homeowners of color, to lose their homes. Unfettered access to predatory credit can devastate communities indefinitely.

When I first started working on this issue, the Internet was hardly 10 years old, and I was in my early 30s. Now I am almost 50, and innovation, algorithms, and machine learning have transformed consumer finance. Affordable credit options are available at credit unions, community development financial institutions, and many financial technology companies or “fintechs.” Even traditional, large financial institutions like Bank of America have affordable small-dollar products. 

We already know what happens when states cap rates because so many states have done it. The reality is that both consumers and the market adapt.

Assuming storefront triple-digit interest payday and title lending once had a role to play in our state’s economy, that time is over. A 36% cap will protect consumers and enable the market for safe and affordable credit to flourish.