Sen. Durbin’s proposed bill:
- Establishes a maximum APR equal to 36% and apply this cap to all open-end and closed-end consumer credit transactions, including mortgages, car loans, credit cards, overdraft loans, car title loans, refund anticipation loans, and payday loans.
- Encourages the creation of responsible alternatives to small dollar lending, by allowing initial application fees and for ongoing lender costs such as insufficient funds fees and late fees.
- Ensures that this federal law does not preempt stricter state laws.
- Creates specific penalties for violations of the new cap and supports enforcement in civil courts and by State Attorneys General.
Payday loans’ annual percentage rates (APR) can be well over 100 percent, with some payday loans having interest rates over 500 percent, according to Business Insider. In Illinois, APRs for payday loans are capped at 391 percent and APRs for installment loans are capped at 99 percent. These high rates can lead borrowers into a debilitating cycle of debt. Payday loans provide fast cash, but many consumers cannot afford to repay their loans and the high fees. As such, many consumers take out multiple payday loans. According to the Center for Responsible Lending, the average payday loan borrower has nine transactions in a year. For example, a borrower may take out a loan for $200 to pay for an unexpected bill. The borrower then pays back the loan with interest, but finds that he cannot pay for another bill. The borrower then applies for another payday loan, repeating the cycle of debt. These repeated transactions led to consumers paying $3.5 billion in payday loan fees each year. Illinois laws prevent some of these egregious practices, including repeated rollovers, but unfortunately that is not the case in every state. Payday loans are a lucrative business, but at the borrowers’ expense.
According to the National Consumer Law Center’s report, the 36 percent cap on payday loan interest rates will lead to a situation where borrowers can receive payday loans, but not get trapped in a continuous cycle of debt. Woodstock Institute has supported the bill in past years and continues to urge policymakers to enact a 36 percent rate cap. Woodstock has conducted research on the impact of payday loans and successfully advocated for reforms on a state level, participated in online campaigns that highlight predatory practices in payday lending, and endorsed modifications to the Military Lending Act. Woodstock strongly supports efforts to protect borrowers from predatory lending and believes this bill is a step in the right direction to reforming the payday lending industry.