Kesha Warren needed a short-term cash injection of $1,250 to cover payroll costs for her small janitorial services business.
In 2019, she took out an auto title loan, a short-term loan that uses the borrower’s vehicle as collateral.
She says she has been cut off from more traditional bank loans.
“Nobody wants to lend to someone who has $100,000 in student loans, so it was very difficult for me to get a traditional loan,” Warren said.
The loan carries an annual interest rate of 197%. This swelled her original loan of $1,250 into a total payment of $3,400 which she repaid early last week. If she hadn’t, it could have cost her another $2,000.
It’s a story that constantly plays out in black and Latino communities.
South Side State Senator Jacqueline Collins co-sponsored Illinois’ Predatory Lending Prevention Act, which would cap annual interest rates on short-term loans at 36%.
“Anything over 36% is predatory and usurious,” Collins said. “So we know that high cost payday loans and auto loans have stripped communities of billions and billions of dollars, primarily black and brown communities in the state of Illinois.”
The bill would impact payday loans â typically a two-week loan in which 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 the state government on behalf of the Illinois Small Loan Association, says the bill’s 36% cap rate will cause most payday and automobiles, while cutting a lifeline for borrowers with poor credit.
“We’re closing these stores, laying people off, giving customers no options, and taking a billion dollars out of the market that was used to fix your car, buy a new refrigerator, spend on kids’ clothes for the ‘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 personal loan rate is 297%.
But Brubaker says the numbers are misleading. When measuring the typical two-week term of the loan, that works out to about $15 per hundred.
“When they see this giant number, they misunderstand what the customer has to pay back,” Brubaker said. âThe average payday loan amount in 2019 was $340. And the average fee amount was $52.
Brent Adams is vice president of the Woodstock Institute, a nonprofit organization that advocates for the interests of low-income communities and communities of color. He says the payday loan industry relies on hooking borrowers into an endless 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 provide an option to roll over the loan, refinance it, take out a different loan, a lot of options,” Adams said. . .
Governor JB Pritzker is expected to sign the legislation, but the problem may not end there.
Opponents of the payday loan industry say they are concerned about a series of bills circulating in the General Assembly right now that they say would undo some of the protections contained in the bill by waiting for the governor’s signature.
State Senator Sue Rezin is one of the sponsors of such a Senate bill, SB2306, which she says would protect consumers while giving them access to loan options.
“Senate Bill 2306 proposes a simple change to the Predatory Lending Prevention Act that would continue to allow traditional financial institutions to offer convenient, well-regulated auto loans to Illinois consumers through Illinois auto dealerships,” Rezin said in an emailed statement to WTTW News. . “Consumer protection for Illinois is critical, which is why my bill balances protecting Illinois consumers with ensuring secure access to auto credit. Under this legislation, Interest rate caps are still in place to protect consumers from predatory lenders, and I look forward to working with all parties to address their specific concerns as we move forward with this legislation.
State Representative John Carroll, who sponsored a similar bill in the House of Representatives, declined to be interviewed.
Brubaker says he thinks the 36% rate cap will have the unintended consequence of pushing borrowers into even more dangerous and unregulated online lending products.
But Collins says credit unions and community banks can pick up the slack, and that ending predatory lending helps eliminate systemic racism.
âUnless we actually challenge these policies and institutional barriers, we will always be faced with policies that preserve inequality,â 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 sponsors’ concerns that predatory lending has a disproportionate impact on communities of color who do not have equitable access to traditional banking services.”
Note: This story was originally published on March 9, 2021. It has been updated.
Follow Paris Schutz on Twitter: @paschutz