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As Illinois caps predatory loan rates at 36%, are payday loans ever the solution?

As Illinois caps predatory loan rates at 36%, are payday loans ever the solution?
(Image credit: Getty)

Illinois has become the latest US state to impose limits on the interest rates that can be charged on risky consumer loans, after Governor J.B. Pritzker signed into law the Predatory Loan Prevention Act (PLPA) on March 23. The final confirmation of a bill which has been years in the making means rates on even the best payday loans, instalment loans and auto title loans issued in Illinois must be capped at 36% APR, with the aim of providing greater protection to vulnerable borrowers. 

According to the Woodstock Institute, Illinois consumers have been spending more than $400 million per year in payday and auto title loan fees, with the average APR on payday loans at 297%. As "People living in communities of color pay over 2.5 times as much as people living in majority white communities", it is also hoped that the rate cap "will significantly benefit black and brown communities", and help reduce the racial wealth gap.

“For over 35 years, legalized loan sharking in Illinois has sapped billions of dollars from lower income and black and brown communities,” said Assistant Majority Leader Jacqueline Collins, a chief sponsor of the PLPA and a long-time advocate for consumer financial protection. “The PLPA’s 36% rate cap strikes the right balance between access to safe and affordable credit on the one hand and protection from predatory lending on the other.”

Pressure for wider protections grows

With Nebraska citizens also voting overwhelmingly to impose the same rate cap on payday lending in the state last November, advocates believe that the PLPA increases the pressure for the introduction of national protections. As the bill passed into law, Illinois became the 18th state plus the District of Columbia to cap interest rates at 36% or less to help prevent predatory lending. 

As Illinois caps predatory loan rates at 36%, are payday loans ever the solution? : An image showing a man staring thoughtfully out of a window

(Image credit: Getty)

“Their protections cover over 100 million people nationally, keeping billions of dollars in the pockets of those with few resources, and opening up the market for healthy and responsible credit and resources that provide real benefits. We must also pass federal reforms, to protect these state caps and expand protections across the country,” said Center for Responsible Lending Director of State Policy Lisa Stifler. 

Could the law limit access to payday loans?

Providing balance to the argument, groups such as the Online Lenders Alliance (OLA) have registered their opposition to the introduction of the bill, suggesting it could have “potentially unintended negative consequences, such as reducing access to credit during a pandemic, especially for the state’s most vulnerable residents.”

In a letter addressed to Governor Pritzker in late January, Mary Jackson, CEO of the alliance, points out that the Department of Homeland Security (DHS) had declared regulated lending businesses, “an essential service during the COVID-19 pandemic”, which was soon followed up via an Executive Order from the Governor’s office, which deemed “small-dollar lenders essential during the pandemic.” 

“The bill’s provisions run counter to the declaration by the DHS as the bill would lead to less credit access while threatening thousands of jobs,” the correspondence continues. “Already several businesses headquartered in Illinois have stated they would leave the state as they are not able to provide small-dollar loans to non-prime consumers under a 36% rate cap. Just last year, the Federal Reserve found that ‘if small loan revenue is constrained by rate ceilings, only large loans will be provided. Consumers who need a small loan or only qualify for a small loan would not be served’.”

Where are payday loans illegal or restricted?

The outcome means the list of states that are hoping to protect consumers by limiting payday lenders from charging excessive fees and interest continues to grow. As a result, the states where extortionately high cost payday lending is prohibited now reads: 

  • Arizona 
  • Arkansas
  • Colorado 
  • Georgia 
  • Illinois
  • Montana 
  • Nebraska
  • New Hampshire 
  • New Jersey 
  • New York 
  • North Carolina
  • South Dakota 

The following states have never authorized payday loans: 

  • Connecticut
  • Maryland
  • Massachusetts
  • Pennsylvania
  • Vermont
  • West Virginia

As Illinois caps predatory loan rates at 36%, are payday loans ever the solution? : Image shows jigsaw of American banknote with pieces missing

(Image credit: Getty)

Can payday loans ever provide a solution?

So are payday loans safe and a viable option for Americans struggling to make ends meet? On the one hand, a case can be made that a sensibly managed payday loan can provide a useful solution to bridge short-term financial gaps. And as OLA points out, small dollar loans might be the only lending option available to those unable to secure the best personal loans because of bad credit. 

However, the arguments made by those advocating the PLPA regarding the dangers of payday lending and the risk of quickly falling into a debt trap undoubtedly ring true too. For this reason, anyone needing to borrow should always explore all of the alternatives to a payday loan first; then, if a payday loan is the only option available, borrowers should always have a definite plan in place to pay off what is owed before the highest interest and fees take hold. 

If debt is proving a far bigger problem, such loans will hardly ever aid the cause. Here, the best choice is to reach out to a debt counselor or debt consolidation companies to see how they may be able to help. As an absolute last resort, perhaps even debt settlement companies could be approached. Crucially, keeping such problems under wraps won’t help solve the issue - without firm action, debt certainly can’t be resolved by itself.

Tim is Finance Editor at Top Ten Reviews. With over 20 years’ experience in the financial services industry, Tim has spent most of his career working for a financial data firm, where he was Online Editor of the consumer-facing Moneyfacts site, and regularly penned articles for the financial advice publication Investment Life and Pensions Moneyfacts. As a result, he has an excellent knowledge of almost areas of personal finance and, in particular, the retirement, investment, protection, mortgage and savings sectors. A keen armchair follower of most sports, Tim regularly plays soccer, and also enjoys attending live music events, when not having to chase after his two children.