Fewer Illinois residents using payday lenders after state crackdown, study finds

During the pandemic, Kesha Thompson-Warren was forced to take out a high-cost loan to keep her landscaping and janitorial services company going. As clients closed their doors, work at her South Holland business, ShadeTree, had dried up.

Thompson-Warren, 42, has accounts with Bank of America but couldn’t get a small business loan from them in 2020, as well as other mainstream banks and credit unions due to her nearly $100,000 student loan debt. She also couldn’t get a loan from the federal Paycheck Protection Program, the $800 billion aid program launched in 2020 to help small businesses.

She resorted to taking out a $1,250 auto title loan from TitleMax. The loan had a 197.64% annual interest rate and required signing over the title of her Lincoln. She paid off the loan in January 2021, after paying $4,211.10 in interest and fees.

Thompson-Warren said she still had to lay off half of her 10 employees before business picked up again.

She knows other people who have taken out similar high-cost loans and struggled with repayment. Some are being pursued by collection agencies.

“It’s been a difficult road. I want to make sure no one else goes through this,” said the mother of two.

It appears far fewer people in Illinois are taking the same route, according to a recent report from the Woodstock Institute, a research and policy nonprofit in Chicago.

High-cost consumer loans have plummeted after the state passed a law in March 2021 to cap interest rates at 36%, including all fees. That year, 17 states and Washington D.C. also had interest rate caps of 36% or lower. More recently, Michigan’s Senate passed a bill Thursday to cap payday loan interest rates at 36%, significantly lower than the current average rate of 370%.

Before the passage of the Predatory Loan Prevention Act, the average interest rate for Illinois auto title loans was 178%; 228% for installment payday loans; and 297% for payday loans.

“Giving a person a high-cost loan for a problem is like throwing a brick at a drowning person,” said Brent Adams, senior vice president at Woodstock Institute and co-author of the January report. Predatory loans are part of an ecosystem that harms minorities and low-income people, he said.

In 2019, Illinois consumers paid $607.4 million in interest and fees — the fourth highest amount in the nation — on more than 1 million payday loans, installment payday loans, auto title loans and small consumer loans, according to Woodstock. In 2022, a year after the predatory loan act went into effect, borrowers took out 105 of those loans and the fees totaled $1,279.

“Us small businesses are suffering because we can’t get anything to get our businesses going,” said Thompson-Warren, who started ShadeTree in 2014. Banks or other financial institutions should offer small loans to help small-business owners, otherwise they are forced to go to payday lenders, she said.

Behind the numbers

The Illinois Legislative Black Caucus spearheaded the Predatory Loan Prevention Act, as part of a package of bills aimed at eliminating the racial wealth gap and socioeconomic disparities. But the broader effort to curb high-cost loans dates back years.

“There is a growing understanding among Illinoisans that these financial systems target people of color and entrench racial poverty,” state Sen. Jacqueline Collins, D-Chicago, said in a statement, when Gov. J.B. Pritzker signed the bill into law.

Historically, Illinois’ minority and lower-income communities took out a disproportionate share of high-cost consumer loans.

In 2019, 78% to 89% of high-cost loan borrowers had annual incomes of $50,000 or less, according to the Illinois Department of Financial and Professional Regulation.

Chicago zip codes with the highest rate of payday and installment payday loans in 2019 and 2020 included Chatham, Auburn Gresham, Roseland, West Garfield Park, Riverdale, according to Woodstock, as well as the village of Dolton, Calumet Park and Blue Island.

In Springfield, more than half of borrowers who lived in areas with minority populations of more than 20% took out 84% of payday and installment loans.

After the loan act was enacted in 2021, many payday lenders, auto title lenders and high-cost installment lenders closed, while more affordable installment lenders expanded in Illinois, suggested Woodstock.

A survey commissioned by Woodstock found that in lieu of taking out high-cost loans, people borrowed from friends, tapped into personal savings, waited until their next paycheck, or used other means to get by. Of the 600 surveyed, including 400 low-income consumers, 27% used a credit card and 22% used personal savings.

Push to regulate pawn shops

Springfield resident Alice Ramey, 83, went to a pawn broker in 2020. A house fire and car accident saddled her with more bills so she took jewelry and antique coins to Monster Pawn in Springfield.

In exchange for her heirlooms, Ramey borrowed $2,050 and eventually paid over $2,500 in interest, but she couldn’t recover two of her items. Pawn records indicate she defaulted on those two loans, but she said the pawn shop lost or sold her property.

“I think they’re ripping off seniors and people who need help,” Ramey said.

Most pawn shop loans have one-month terms. Ramey couldn’t pay the loans in full, so rolled over each of her loans by paying only the interest. She extended the loans more than 20 times.

Unlike payday lenders, the pawn industry is not required to share loan data with state regulators. However, a bill that passed the Illinois General Assembly on March 7 will require pawnbrokers to start reporting data and prohibit them from making auto title loans — but they can still charge interest rates of 240% and above on loans below $500. The bill, HB0779, is waiting for Gov. J.B. Pritzker’s decision to pass, veto or amend it.

“People understand if interest rates are high or not. But they don’t necessarily fully understand the implications of high-cost loans,” Adams, of Woodstock, said. “People believe they will pay it off quickly, but then they have other commitments. They don’t pay, and it gets them into a cycle of debt.”

The predatory loan act initially included pawn loans. After strong resistance and lobbying from the state’s pawn industry, a Sangamon County judge ruled in September 2021 that the law did not apply to them because of a legal loophole, according to Woodstock.

Kelly Swisher, president of the Illinois Pawnbrokers Association, said the ruling was not due to a loophole. “A pawn transaction does not, and can not, create a cycle of debt. Simply put, a pawn is not a loan because there is never an obligation to repay,” he said.

It’s unclear how many former borrowers of high-interest loans were pushed to pawn brokers. After Ohio capped interest on payday loans at 28%, the state saw a 97% increase in pawn shops, according to Woodstock’s report.

Meanwhile, across the country, overall consumer debt is swelling. Credit card and auto loan delinquencies are rising and exceeding pre-pandemic levels, according to the New York Federal Reserve Bank.

“The solution for consumers struggling to make ends meet is not more debt,” said the Woodstock report. It cited other tools such as cash assistance, “baby bonds” (publicly-funded child trust accounts), child savings accounts, tax credits, student loan forgiveness, free tuition at public universities, a living wage and reparations as ways to improve financial stability.