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Around the country, legislation is currently being considered that would cap interest rates on loans and undermine access to credit for countless Americans. While this policy sounds attractive on paper, it has been a failure when put into practice. None of these bills are quite as destructive as the Illinois Predatory Loan Prevention Act (PLPA). But unfortunately for Illinois, Governor J.B. Pritzker has gone against the best interest of his residents and signed the PLPA into law.
Proponents of the Predatory Loan Prevention Act claim that restricting interest rates below market level will protect working people. This couldn’t be further from the truth. By mandating lower interest rates, thousands of potential borrowers who would’ve otherwise been able to obtain credit will be effectively denied access to it.
The rationale behind banks charging higher interest rates for some individuals is simple: Providing credit to riskier borrowers is a larger financial risk to lenders than making it available to those with a stable credit history. Creating a cap on interest rates forces these lenders to restrict credit to those who would otherwise be able to obtain it with high-interest loans.
Simply put, this attempt by Governor Pritzker and Illinois legislators to decrease interest rates won’t benefit those with lower credit who would otherwise take out high-interest loans — what it will actually do is deny them access to such credit altogether. An analysis by the Federal Reserve Bank of New York found that potential borrowers with under a FICO score under 680 are four times more likely to have their loan applications rejected than those with scores over 680. The legislation Governor Pritzker signed will radically grow this disparity.
And despite claims to the contrary, the 36 percent cap on interest rates codified in the Predatory Loan Prevention Act isn’t anything new. An identical rate cap was set under a similar, failed bill, the Military Lending Act (MLA). Passed in 2006, this federal law capped interest rates for loans to any active-duty military borrower at 36 percent. If Governor Pritzker and other supporters in the state legislature think that the Predatory Loan Prevention Act will help the people of Illinois, perhaps they should first take a look at the results of the MLA following its implementation.
A recent HarrisX poll of active military service members found that nearly 20% of respondents said they were worried about paying their debts, compared to just 10% in 2014. An even more troubling fact researchers discovered was that the majority of military households had been denied loans because of the provisions contained within the Military Lending Act.
Despite these statistics, Governor Pritzker and advocates of the PLPA continue to insist that it is the first step towards “equitable” lending, increasing credit access for communities of color which have been traditionally underbanked. However, the opposite is the case.
The FDIC 2019 Survey found that Black and Hispanic families with incomes under $75,000 were already 20 to 30 percent less likely to have access to a neighborhood bank for personal loans. The interest rate caps contained within the Predatory Loan Prevention Act will decrease the credit available to these communities by driving down interest rates, tempting Illinoisans who would’ve otherwise obtained credit to consider risky behavior to pay their bills, such as bouncing checks.
What is too easily ignored by Gov. Pritzker and co. is that high interest loans can actually help working and minority families improve their financial health. In fact, a survey by Morning Consult found that a large plurality of borrowers increased their credit scores after taking out a 12-month loan with a fintech. Black and Hispanic families said that their credit scores improved the most.
Governor Pritzker and proponents of the Predatory Loan Prevention Act claim that it will benefit the people of Illinois. In reality, this failure of a bill will hurt most acutely those who it intends to help: everyday Illinoisans seeking access to credit. Having been a struggling divorced Mom, working two jobs to make ends meet, I know the wave of panic and despair that swept over me when an unexpected repair bill fell upon me. Loan options such as these are a real lifeline in those circumstances. Due to Governor Pritzker and other Illinois lawmakers’ poor understanding of loan interest rate caps, the PLPA is now law, and the people of Illinois will have to suffer the consequences. The sooner this bill can get repealed, the better.
Carol Davis is a resident of Wheaton, IL. She serves as chair of the FreedomWorks activist advisory council.