“Outside of business”. This sign is not new in the past 18 months.
Thanks to the coronavirus pandemic, sales for many traders have dried up, doors have been closed and employees have been laid off.
But across Illinois, 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 instant loans and other short-term, high-interest loans that critics say keep borrowers trapped in a never-ending cycle of debt. They can’t pay it all off, these reviews say, so customers end up borrowing even more.
The term “payday loan” refers to the usual length of the loan, approximately two weeks, the interval between pay days 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 auto title is held as collateral and short-term installment loans, which allow for a longer repayment period than payday loans.
The amounts borrowed are generally 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 a southern suburb 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 that promotes interest limits on such loans.
Charla Rios, a researcher at a national group, the Center for Responsible Lending, says payday loans and the like “do a lot more harm than good.”
Before Illinois passed its Predatory Loan Prevention Act, payday loans and other short-term loans could reach an annual percentage rate of 404 percent. The new law caps those rates at 36% APR, in line with similar legislation in 17 other states and the District of Columbia.
Even 36% is more than double what a person with bad credit would pay for a car loan, according to US News & World Report, although car loans are typically for much higher amounts borrowed with longer repayment periods. long.
In addition to impacting payday loans and auto titles, the Illinois Interest Cap Act also affects installment loans from online lenders.
The national organization representing online lenders says consumers are in fact wronged by Illinois law, with fewer borrowing options available to those who may not be entitled to money from them. a bank, a savings and credit union or a credit union.
Andrew Duke, executive director of the Online Lenders Alliance, calls the law “a solution in search of a problem”.
A federal consumer agency, he says, saw just 1% of public complaints in 2020 were about personal loans.
“This data,” says Duke, “indicates that customers generally don’t have problems with small loan products. ”
“Cap rates,” Duke adds, “do not reduce the cost of credit, but rather reduce access to credit.”
Lenders also claim that the emphasis on the annual percentage rate can be misleading, because even though 300-400% is the annual rate and may seem extremely high, the actual amount repaid for a small loan is relatively small if the loan is reimbursed on time. For example, before the new Illinois law came into effect, the $ 100 loan fee was $ 15.50 for a two-week loan.
But supporters of the law say borrowers often can’t meet the due date, the loan rolls over, and the customer is buried in ever-growing 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 initially think they’ll be able to repay, say, $ 500 on time.
But, he says, “research shows that a trap is more common than not,” as the borrower cannot meet the due date and has to extend the loan, “buying more time with new fees. added. The average payday loan borrower, ”Adams says,“ renews the loan a lot ”
Duke of the Online Lenders Group says short-term, low-value loans can be a much better alternative to missing bill payments, accumulating credit card debt, or even filing for bankruptcy.
When loan volumes decline, says Duke, “other harmful options increase.”
He says the interest cap in Illinois will force many online lenders to go out of business here because it would be impossible to make a profit.
“I suspect there has been a pretty big setback,” he says.
But critics say that high interest on such loans can cause exactly the same problems, like missing other payments or ultimately going to bankruptcy court.
One of the driving forces behind 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 per year, during the period 2012-2019. The value of the transaction during this period was almost $ 7 billion.
“These products,” Adams says, “almost with surgical precision target black and brown communities.”
Although Evanston has a significant population of all races, it is primarily a well-to-do community with less appeal to brick and mortar payday loan stores, even before Illinois’ new law. .
In fact, nine years ago Evanston City Council limited the location of payday loan stores to a handful of industries. The three such stores at the time did not have to relocate, but any new stores would have been limited to a few locations.
There are several financial literacy programs available in Evanston, for consumers who want to learn how to manage money better, or perhaps, with lack of money.
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 the Wintrust and Byline banks also have similar offers.
The interest cap law has had a huge impact on the short-term loan industry in Illinois. A state study found that there were 1,578 licensees offering short-term loans of different types and terms at the end of 2019.
According to Adams of the Woodstock Group, 75% of those had closed last July.
And Evanston, it seems, may not have any more. A search using Google Maps shows that most payday loan stores are gone.
And what may have been the last, in 1828 Dempster, is also empty. An employee at the nearby check-cashing business told Evanston Now that the payday loan store closed four to six months ago, shortly after the rate cap went into effect. Illinois interest.