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Payday lending stores are being forced to close due to state law.

Sales for numerous retailers dried up as a result of the coronavirus pandemic, doors were closed, and staff laid off.

However, a state regulation implemented earlier this year has resulted IPass personal loans in the closure of hundreds of particular sorts of establishments across Illinois, including at least one in Evanston. That is just what many lawmakers and consumer activists desired.

Why are the payday lending stores being closed?

Payday loans and other short-term, high-interest loans were given by the companies in question, according to critics. These loans tend to trap borrowers in a never-ending cycle of debt. The critics claim that because they can’t pay everything back, clients wind up borrowing even more.

The name “payday loan” refers to the typical loan period of two weeks, which corresponds to the time between paydays for most borrowers. 

Payday loans necessitate complete payback by the deadline, plus a borrowing fee. Short-term loans that use a borrower’s car title as security and short-term installment loans that allow repayment over a prolonged period than payday loans are also available.

Customers with “subprime” credit ratings, which make it unlikely for a bank to do transactions with them, typically borrow between a few hundred and a few thousand dollars.

According to a video produced by the Chicago Community Trust, an organization that favors interest caps on such loans, Kesha Warren of suburban South Holland says she borrowed $1,250 on a car title loan to help keep her company afloat. However, she ended up owing not only the principal but also $4,200 in fees and interest.

Are payday loans any harmful?

Payday loans and other comparable instruments, according to Charla Rios, a researcher with the Center for Responsible Lending, “do significantly more harm than benefit.”

Payday and other short-term loans could have a 404 percent annual percentage rate before Illinois approved the Predatory Loan Prevention Act. The new law, which is in line with similar laws in 17 other states and the District of Columbia, caps such rates at 36 percent APR.

According to U.S. News & World Report, 36% is more than double what someone with low credit would pay for a car loan, even though car loans are typically for much larger borrowed amounts with longer repayment periods.

How will this payday law affect consumers?

The Illinois interest cap law impacts installment loans from internet lenders as well as payday and auto title loans. The Illinois rule, according to the national organization representing internet lenders, is harming consumers by reducing the number of borrowing options accessible to those who may not be eligible for money from a bank, savings and loan, or credit union.

The law is “a solution in search of a problem,” according to Andrew Duke, executive director of the Online Lenders Alliance. According to him, only 1% of public complaints in 2020 were against personal loans, according to a federal consumer watchdog.

“That data shows that, on the whole, customers don’t have concerns with modest loan products,” Duke says. “Rate restrictions don’t cut the cost of credit; they lower access to credit,” Duke says.

Are payday loans expensive?

Lenders also claim that focusing on the annual percentage rate can be misleading since, while the yearly rate of 300-400 percent may appear to be excessively high, the real amount paid back for a small loan is fairly low if it is paid back on time. Before the new Illinois law took effect, the charge for borrowing $100 for a two-week loan was $15.50.

However, proponents of the rule argue that borrowers frequently miss payments, the loan is rolled over, and the customer is buried in ever-increasing debt. Alternatively, the consumer may repay the loan on time, only to need to borrow again a few weeks later.

Borrowers first believe they will be able to return a $500 loan on time, according to Brent Adams of the Illinois-based Woodstock Institute, a liberal policy research group.

“Research shows that a trap is more prevalent than not,” he argues, because the borrower can’t pay the loan on time and needs to prolong it, “buying more time with a new cost slapped on.” “The average payday loan borrower spreads the loan over a lot,” Adams explains.

Short-term, low-dollar loans, according to Duke of the online lenders’ organization, can be a far better alternative to missing bill payments, accumulating credit card debt, or even filing for bankruptcy.

“Other negative possibilities increase” as loan volume decreases, according to Duke.

Implications of the law

According to him, the Illinois interest cap will drive many internet lenders to stop doing business in the state because it will be unable to earn a profit.

“I believe there has been a significant pullback,” he says.

However, detractors argue that high-interest rates on such loans can lead to the same issues, such as skipping other payments or ending up in bankruptcy court.

Where can I find payday loan stores?

Payday loan stores are typically found in low-income, minority neighborhoods, according to Adams of the Woodstock Institute.

In the period 2012-2019, more than half of short-term, high-interest borrowers earned less than $30,000 per year, according to the State of Illinois. The total value of transactions throughout that time was nearly $7 billion.

“These items are almost surgically precise in their targeting of Black and brown communities,” Adams argues. Even before the new Illinois law, Evanston was predominantly an upscale city with little appeal for physical and mortar payday loan stores, despite its large population of people of all ethnicities.

AmeriCash Loans, located at 1801 Dempster St., closed just before the new state law went into effect. (Image courtesy of Google Maps, November 2018.)

Indeed, Evanston City Council prohibited the location of payday lending stores to a few business zones nine years ago. The three stores that existed at the time did not have to relocate, but any new ones would have been restricted to the few locations available.

Why you should learn more about money 

In Evanston, there are various financial literacy classes for anyone who wants to learn more about money and how to manage with a lack of it.

The city intends to continue a program with First Northern Credit Union that was placed on pause due to the coronavirus outbreak. You can find similar services via the local YWCA or Wintrust and Byline banks.

The Illinois interest cap rule has had a significant influence on the short-term lending industry. According to a governmental investigation, 1,578 licensees were offering various sorts and lengths of short-term loans at the end of 2019.

As of July, 75 percent of those had closed, according to Adams of the Woodstock group.

And it appears that Evanston may no longer have any. A Google maps search reveals that the majority of what used to be classified as payday lending establishments has vanished.