When the coronavirus first posed a threat to Americans’ health and finances, Forest Park’s Tiffany Moore went to an installment lender for the first time in hopes of financial relief.
The good news: She was approved for a $9,500 loan to offset a tenant on her property who couldn’t pay rent. The bad news: an interest rate of 35.989%.
It was easy to sign a contract that brought temporary relief. But when Moore realized she would end up paying more than double her loan, she paid off the loan early.
Payday loans, title loans, and installment loans with exorbitant interest rates can put borrowers in a financial death grip. That remains so, though the Illinois Predatory Loan Prevention Act now caps the 36% annual percentage rate that lenders can charge.
As a report by The Sun-Times’ Stephanie Zimmermann makes clear, these exorbitant deals continue to proliferate in Black and Brown neighborhoods.
Lawmakers should consider ways to improve access to credit for vulnerable communities without resorting to high-yield loans.
Payday lenders point out that they serve neighborhoods and high-risk borrowers that other lenders avoid.
Yes, they provide a needed service. But what desperate borrower can pull themselves out of their financial distress while borrowing money at an interest rate of 36%?
cycle of disinvestment
The report highlights data compiled by the nonprofit Woodstock Institute, which found that top payday loan ZIP codes were predominantly black. The zip codes included 60619 and 60620 on the south side, both of which are 95.7% black and include Chatham, Avalon Park, Auburn Gresham, and Washington Heights. The 60614 ZIP code, which includes Lincoln Park and is 84% white, showed the lowest number of payday borrowers.
“Consumers only need triple-digit lending when they are in a divestment cycle. Otherwise they would get a safer and more affordable product,” Brent E. Adams, senior vice president of policy and communication at the Woodstock Institute, told us. “These lenders are dependent on the divestment cycle and are irrelevant when communities are thriving.”
In March, this editorial supported the cap on payday loan interest, writing that Illinois should impose it out of fairness and in the interest of racial justice. About 40% of Illinois borrowers ultimately default on payday loans. More often than not, they end up in a debt cycle where old loans are swapped out for new ones.
Another step along the way could be bringing affordable banking services back to lower-income neighborhoods that have suffered from divestments.
Members of Congress have expressed support for a postbanking pilot program in rural and urban communities across America. The goal would be for the government to learn from the pilot and establish permanent banking services as part of the US Postal Service. The non-profit bank would offer cheap checking and savings accounts, mobile banking and low-interest loans.
State Rep. Mary E. Flowers has campaigned for the Community Bank of Illinois Act for over a decade, but faces continued opposition from bankers.
“Banks are in the business of making money, and here I am proposing lower interest rates for residents,” Flowers said. “All I want to do is lend to people they wouldn’t lend to.”
We don’t believe in the idea of federal or state public banking. There are many unanswered questions about how the model will work, as well as the potential cost to taxpayers.
But the idea of a system that would allow low-income unbanked borrowers to get their basic banking needs met and also have access to small, low-interest loans is worth considering.
There’s no reason to expect payday loan companies to agree to further lower the 36% cap, if at all. Ed McFadden, a spokesman for the American Financial Services Association, points to a 2015 Federal Reserve survey in which lenders said they could not break even on loans below $2,532 at an APR of 36%.
Public postal banking isn’t a direct solution, but it could help deal a blow to the predatory payday loan problem.
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