During the pandemic, Kesha Thompson-Warren took 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 there in 2020 nor from other banks and credit unions because she had nearly $100,000 in student-loan debt.
She also couldn’t get a loan from the federal Paycheck Protection Program, the $800 billion program launched in 2020 to provide relief to business owners during the COVID-19 pandemic.
She resorted to taking out a $1,250 auto-title loan from TitleMax that carried a 197.64% yearly interest rate and required signing over the title of her Lincoln. She paid off the loan in January 2021, having paid a total of $4,211.10 in interest and fees.
Thompson-Warren — who still had to lay off half of her 10 employees before business picked up — says she knows others who have taken out similar high-cost loans and struggled with repayment, some of them now being pursued by collection agencies.
“It’s been a difficult road," says Thompson-Warren, a mother of two. "I want to make sure no one else goes through this."
Far fewer people in Illinois are taking the same route, according to a report from the Woodstock Institute, a research and policy nonprofit in Chicago.
The number of high-cost consumer loans has plummeted since an Illinois law passed in March 2021 capped interest rates at 36%, including all fees.
That year, 17 states and Washington, D.C., also had interest rate caps of 36% or lower.
On Thursday, Michigan’s Senate passed a bill 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,” says Brent Adams, senior vice president for the Woodstock Institute, who was a co-author of the report and says predatory loans are part of a financial ecosystem that particularly hurts minorities and low-income people.
In 2019, Illinois consumers paid $607.4 million in interest and fees — fourth-highest in the nation — on more than 1 million payday loans, installment payday loans, auto-title loans and small consumer loans, the Woodstock Institute found. In 2022, a year after the predatory loan act took 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,” says Thompson-Warren, who started ShadeTree in 2014.
She hopes more banks and other financial institutions would offer small loans to help owners of small businesses, who otherwise sometimes end up turning to higher-interest payday lenders.
Behind the numbers
The Illinois Legislative Black Caucus pushed for the the law as part of a package aimed at cutting into 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 when Gov. J.B. Pritzker signed the 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 yearly 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 as did the south suburbs Dolton, Calumet Park and Blue Island, according to the Woodstock Institute.
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 law was passed, it appears that many payday lenders, auto-title lenders and high-cost installment lenders closed, while more affordable installment lenders expanded in Illinois, according to the Woodstock Institute.
A survey it commissioned found that, rather than take out high-cost loans, more people borrowed from friends, tapped personal savings, waited until their next paycheck or used other means to get by. Of 600 people surveyed, including 400 low-income consumers, 27% said they used a credit card, and 22% dipped into savings.
A ‘cycle of debt’
Alice Ramey, 83, of Springfield, went to a pawnbroker in 2020 after a house fire and car accident saddled her with bills. 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.
Most pawn shop loans have one-month terms. Ramey couldn’t pay the loans in full, so she rolled over each of her loans by paying only the interest. She extended the loans more than 20 times.
“I think they’re ripping off seniors and people who need help,” Ramey says.
Unlike payday lenders, the pawn industry isn't required to share loan data with state regulators. 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 — though they still will be able to charge interest rates of 240% and above on loans of less than $500. Pritzker needs to sign it for it to become law.
“People understand if interest rates are high or not," says the Woodstock Institute's Adams. "But they don’t necessarily fully understand the implications of high-cost loans. 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. But a Sangamon County judge ruled in September 2021 that the law did not apply to them.
“A pawn transaction does not and cannot create a cycle of debt," says Kelly Swisher, president of the Illinois Pawnbrokers Association. "Simply put, a pawn is not a loan because there is never an obligation to repay."
It's unclear how many former borrowers of high-interest loans were pushed to pawnbrokers. After Ohio capped interest on payday loans at 28%, that state saw a 97% increase in the number of pawnshops, according to the Woodstock Institute.
Nationally, consumer debt is swelling. Credit-card and auto-loan delinquencies are rising, 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,” the Woodstock Institute report says.
It points to other tools, such as cash assistance, "baby bonds," which are publicly funded child trust accounts, child savings accounts, tax credits, student loan forgiveness, free tuition at public universities and reparations as ways to improve financial stability.