Chicago, IL — A new report by the Illinois Asset Building Group (IABG) and Woodstock Institute finds that increasing numbers of Illinois consumers are ending up in a long-term cycle of debt due to triple-digit interest rates and long loan terms as they turn to title loans to try to make ends meet.
“Because title loans are largely unregulated in Illinois, lenders have increased loan terms to an average of over 18 months while still charging interest rates over 200 percent APR,” said Spencer Cowan, Senior Vice President of Research at Woodstock Institute. “Multi-year, triple-digit loans are incredibly expensive and, with the borrower’s car title securing the loan, there is very little incentive for the lender to consider the borrower’s ability to repay the loan with his or her existing income. Borrowers are taking out loans they cannot afford, being trapped in a cycle of debt, with a very high risk of default.”
The report, “No Right Turn: Illinois’ Auto Title Loan Industry and its Impact on Consumers,” uses data from two reports on the consumer lending industry released by the Illinois Department of Financial and Professional Regulations (IDFPR) and loan-level data from court records of collection cases filed in Cook County. The report finds that:
- The vast majority of title loans in Illinois are taken out by low-income people. Nearly three quarters of all title loan borrowers in Illinois have incomes of less than $30,000, and over 90 percent have incomes of less than $50,000.
- The number of title loans issued in Illinois has steadily increased between 2009 and 2013. In 2009, Illinois consumers borrowed an estimated 73,116 title loans. By 2013, that number had increased to 100,698 title loans.
- The annual percentage rate (APR) charged by lenders has decreased slightly, but the average term, principal amount, and total fees have increased significantly. While the average APR decreased from 285 percent to 234 percent, title loans in Illinois now have an average term of 18.6 months with principal amounts of $1,089 and average fees of over $3,000.
- Illinois title lenders made loans to consumers in other states where title loans are illegal. Illinois court records show that Illinois lenders made online title loans to consumers who live out of state, including states where title lending is illegal, and then sued the consumers in Illinois.
“Financially vulnerable families are turning to high-cost title loans to try to help make ends meet or cover the cost of an unexpected expense. Soon they find themselves in a cycle of debt that leaves them even more financially fragile,” said Lucy Mullany, Senior Project Manager for Financial Empowerment Policy at the Heartland Alliance and Coordinator of the Illinois Asset Building Group. “We need increased access to safe and affordable small dollar loans and strong consumer protections at the state and federal levels that ensure consumers aren’t forced to choose between making a title loan payment and covering regular monthly expenses such as food or rent.”
Woodstock Institute and IABG recommend that:
- The Consumer Financial Protection Bureau (CFPB) issue strong rules covering high-cost, small-dollar loans, including title loans, to ensure loans are safe and affordable.
- Congress pass legislation instituting a 36 percent cap for all consumer loan products, including title loans. • The Illinois legislature should strengthen the Consumer Installment Loan Act to require stronger ability-to-repay standards, maximum loan terms, and a rate cap of 36 percent APR.
- The Illinois Department of Financial and Professional Regulation (IDFPR) publicly release loan-level data from the state database to allow for a more detailed analysis and monitoring of small-dollar lending in Illinois.
- Financial Institutions should create and market affordable, small-dollar loans with ability-to-repay standards as alternatives to high-cost, predatory products.
Learn more about auto title lending in Illinois at our webinar on November 3rd at 1:00PM CST. Register Now.
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The Illinois Asset Building Group (IABG) is a statewide coalition committed to increasing access to the tools people need to build financially secure futures for themselves and their children. IABG’s work across issue areas includes examining barriers and solutions to the persistent racial wealth gap. IABG a project of Heartland Alliance. For more information, visit http://www.illinoisassetbuilding.org
Heartland Alliance – the leading anti-poverty organization in the Midwest – believes that all of us deserve the opportunity to improve our lives. Each year, we help ensure this opportunity for nearly one million people around the world who are homeless, living in poverty, or seeking safety. For more information, visit:http://www.heartlandalliance.org
Woodstock Institute is a leading nonprofit research and policy organization in the areas of equitable lending, wealth creation, and safe and affordable financial products and services. Woodstock Institute works locally and nationally to create a financial system in which lower-wealth persons and communities of color can safely borrow, save, and build wealth so that they can achieve economic security and community prosperity. Our key tools include: applied research; policy development; coalition building; and technical assistance. Woodstock Institute has been a recognized economic justice leader and bridge-builder between communities and policymakers in this field since it was founded in 1973 near Woodstock, Illinois. Now based in Chicago, we work with community and philanthropic groups, financial institutions, and policymakers. For more information, visithttp://www.woodstockinst.org/