“Out of business.” This sign is nothing new in the last 18 months.
Thanks to the coronavirus pandemic, sales for many merchants have dried up, doors have been closed and employees have been laid off.
But across Illinois, a state law passed earlier this year closed hundreds of certain types of stores, including at least one in Evanston. And that’s exactly what many lawmakers and consumer advocates wanted to happen.
The companies in question offered payday loans and other high-interest short-term loans that critics say kept borrowers trapped in an endless cycle of debt. They can’t pay it all back, these reviewers say, so customers end up borrowing even more.
The term “personal loan” refers to the usual length of the loan, about two weeks, the time between paydays for many borrowers. Payday loans require full repayment on the due date, plus borrowing costs. There are also short-term loans where a borrower’s car title is held as collateral and short-term installment loans, which allow repayment over a longer period than payday loans.
Amounts borrowed are typically a few hundred to a few thousand dollars, from customers who often have subprime credit ratings, making it unlikely that a bank will transact with them.
Kesha Warren, from the southern suburbs of Holland, says she borrowed $1,250 on a car title loan to help keep her business afloat, but ended up owing not only the principal, but also $4,200. $ in interest and fees, according to a video produced by the Chicago Community Trust, an organization promoting interest caps on such loans.
Charla Rios, a researcher with a national group, the Center for Responsible Lending, says payday loans and similar instruments “cause far more harm than good.”
Before Illinois passed its predatory lending prevention law, payday loans and other short-term loans could reach an annual percentage rate of 404%. The new law caps those rates at 36% APR, consistent with similar legislation in 17 other states and the District of Columbia.
Even 36% is more than double what someone with bad credit would pay for a car loan, according to US News & World Report, although car loans are generally for much higher amounts borrowed with longer repayment periods. long.
In addition to impacting payday loans and auto title loans, Illinois’ interest cap law also affects installment loans from online lenders.
National organization representing online lenders says consumers are actually being harmed by Illinois law, with fewer borrowing options available to those who may not qualify for money from a bank , savings and loan or credit union.
Andrew Duke, executive director of the Alliance of Online Lenders, calls the law “a solution in search of a problem”.
A federal consumer agency, he says, saw just 1% of complaints from the public in 2020 about personal loans.
“These data,” says Duke, “indicate that customers generally don’t have problems with small loan products.”
“Rate caps,” Duke adds, “do not reduce the cost of credit, but rather access to credit.”
Lenders also say that the emphasis on the annual rate can be misleading because while 300-400% is the annual rate and may seem extremely high, the actual amount repaid for a small loan is relatively low if the loan is repaid at time. For example, before the new Illinois law took effect, the fee to borrow $100 was $15.50 for a two-week loan.
But supporters of the law say borrowers often cannot meet the due date, the loan is rolled over and the customer is buried in ever-increasing debt. Or, the customer repays the loan on time, to borrow again a few weeks later.
Brent Adams of the Illinois-based Woodstock Institute, a liberal policy study group, says borrowers first feel they will be able to repay, say, $500 on time.
But, he says, “research shows that a pitfall is more common than not” because the borrower cannot meet the due date and must extend the loan, “buying more time with new added fees. The average payday loan borrower,” says Adams, “renewes the loan often”
Duke of the Online Lenders Group says short-term, low-dollar loans can be a much better alternative to missing bill payments, piling up credit card debt, or even filing for bankruptcy.
When lending volume declines, Duke says, “other harmful options rise.”
He says the interest cap in Illinois will force many online lenders out of business here because it would be impossible to make a profit.
“I suspect there’s been quite a significant pushback,” he says.
But critics say high interest on such loans can cause the exact same problems, like missing other payments or ultimately heading to bankruptcy court.
One of the driving forces behind the Illinois law was the Legislative Black Caucus.
Adams of the Woodstock Institute says payday loan stores are typically located in low-income minority neighborhoods.
According to the State of Illinois, more than half of short-term, high-interest borrowers earned less than $30,000 a year, during 2012-2019. The value of transactions during this period was nearly $7 billion.
“These products,” says Adams, “almost with surgical precision target black and brown communities.”
Although Evanston has a large population of all races, it is primarily an affluent community with less appeal to brick-and-mortar payday loan stores, even before the new Illinois law. .
In fact, nine years ago, Evanston City Council limited the location of payday loan stores to a handful of commercial areas. The three such stores at the time did not have to relocate, but any new stores would have been limited to the few locations.
There are several financial education programs available in Evanston, for consumers hoping to learn how to better manage money, or perhaps lack thereof.
The City plans to renew a program with First Northern Credit Union, which has been suspended due to the coronavirus pandemic. The local YWCA, as well as Wintrust and Byline banks also offer similar offers.
The Interest Cap Act has had a significant impact on the short-term lending industry in Illinois. A state study found there were 1,578 licensees offering short-term loans of various types and terms at the end of 2019.
According to Adams of the Woodstock Group, 75% of them had closed by last July.
And Evanston, it seems, may not have any more. A search using Google Maps shows that most of what were once listed as payday loan stores are gone.
And what may have been the last, at 1828 Dempster, is also empty. An employee of the nearby check-cashing business told Evanston Now that the payday loan shop closed four to six months ago, shortly after the rate cap came into effect. Illinois interest.