Kesha Warren needed a short-term cash injection of $ 1,250 to cover the salary costs of 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.
“No one 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 carried an annual interest rate of 197%. This inflated her original loan by $ 1,250 into a total payment of $ 3,400 which she repaid early last week. If she hadn’t, it could have cost her an additional $ 2,000.
It’s a story that’s constantly played out in black and Latino communities.
South Side State Senator Jacqueline Collins co-sponsored Illinois’ Predatory Loan Prevention Act, which would cap annual interest rates on short-term loans at 36%.
“Anything over 36% is predatory and wear and tear,” Collins said. “So we know that high-cost payday loans and auto loans have robbed communities of billions and billions of dollars, primarily 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 lending and other short-term lending products.
Steve Brubaker, who lobbies the state government on behalf of the Illinois Small Loan Association, says the 36% cap rate in the bill will effectively bankrupt most breakdown and auto title stores , while cutting a lifeline for borrowers with poor credit.
“We are closing these stores, we are laying people off, we are not giving customers any options and we are taking a billion dollars out of the market that was used to fix your car, buy a new refrigerator, spend on children’s 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 rate for payday loans is 297%.
But Brubaker says the numbers are misleading. When you measure the typical two-week loan term, it comes down to about $ 15 per cent.
“When they see this giant figure, they misunderstand what the customer has to pay back,” Brubaker said. “The 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 on behalf of low income communities and communities of color. He says the payday loan industry relies on hooking borrowers into a never-ending cycle of debt with hidden running costs.
“The business model is to keep the consumer on the loan, so when the bill comes due the lender will offer an option to roll over the loan, refinance it, take out another loan, a number of options,” Adams said. . .
Governor JB Pritzker is expected to sign the legislation, but the problem might not end there.
Opponents of the payday lending industry say they are concerned about a series of bills currently circulating in the General Assembly that they believe would remove some of the protections contained in the bill pending the governor’s signature.
State Senator Sue Rezin is a sponsor of one such Senate bill, SB2306, which she says would protect consumers while giving them access to lending options.
“Senate Bill 2306 proposes a simple amendment to the Predatory Loan Prevention Act that would continue to allow traditional financial institutions to offer convenient, well-regulated auto loans to consumers in Illinois through Illinois auto dealers, ”Rezin said in an emailed statement to WTTW News. . “Protecting Illinois consumers is essential, which is why my bill strikes a balance between protecting Illinois consumers and ensuring secure access to auto 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 Representative 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 unintentionally push borrowers into even more dangerous and unregulated online lending products.
But Collins says credit unions and community banks can pick up the slack, and ending predatory lending helps eliminate systemic racism.
“Unless we really face these policies and institutional barriers, we will always face policies that preserve inequalities,” 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 is having a disproportionate impact on communities of color that do not have equitable access to traditional banking services.”
Note: This story was originally posted on March 9, 2021. It has been updated.
Follow Paris Schutz on Twitter: @paschutz