Why are these new protections so necessary? What are small consumer loan borrowers up against until this law takes effect? Our research documenting the state of payday and consumer installment lending in Illinois discovered that:
• Illinoisans were paying up to 1100% interest for loans with terms of 9 months or more;
• High-cost small consumer loans largely drained wealth from lower-income women living in communities of color;
• The median consumer installment loan borrower in Illinois paid $611 in finance charges on a $1400 loan;
• Borrowers commonly refinanced their consumer installment loans just 1/3 of the way through the original loan, extending the cycle of debt;
• Nearly half of consumer installment lenders in IL included unnecessary and expensive insurance products in their loans;
• The last time payday loan reforms were passed in 2005, lenders changed their loan terms to avoid the protections—and the new reforms close that loophole.
Borrowers—largely people living in communities of color, women, and low-wealth individuals—were paying high fees for long periods of time, sometimes ending in unaffordable balloon payments. The new protections take aim at these wealth-draining practices by:
• Capping the annual percentage rate (APR) on all unsecured small consumer loans for the first time, regardless of the size or type of loan;
• Breaking the cycle of debt by limiting refinances and the amount of time a borrower can be in debt;
• Prohibiting unaffordable balloon payments and requiring affordable monthly payments indexed to a borrower’s income;
• Strengthening regulators’ ability to enforce the law by requiring lenders to report all loans and loan terms to a consumer reporting service.
Woodstock, as part of the Monsignor John Egan Campaign for Payday Loan Reform, has worked for years to pass a rate cap for every loan no matter the size or structure, end the cycle of destructive debt, ensure affordable monthly payments, and empower regulators to effectively enforce the law. The Egan Campaign and General Assembly reform bill sponsors worked closely with the industry and policymakers for several years to achieve the latest reforms. No changes should be made without broad agreement among all of those parties.