Wednesday, August 1, 2007

A state study found that a 2005 law regulating Illinois payday loans saved borrowers $20.6 million in loan fees and interest charges over 18 months.

The good news is tempered by the fact that payday lenders have been moving into longer-term, high-interest loans not covered by the reform law, according to consumer advocates.

“Our worst fears have been realized,” said William McNary, co-director of Citizen Action/Illinois. He said lenders have told his organization that less than 5 percent to 10 percent of the personal loans they now issue are payday loans, because they don’t make money the way they used to.

Payday loans are short-term loans for small amounts of money secured against a post-dated check. The industry says the loans provide people with quick cash for emergencies, but consumer advocates say the loans prey on the poor with triple-digit interest.

The law limits the interest that can be charged for supposedly low fee payday loans to $15.50 per $100 and caps loans based on a borrower’s pay, along with other reforms.

Before the law took effect, the average finance charge for short-term loans was $20 per $100 borrowed for a 14-day loan and $45 per $100 for a 31-day loan, according to the Illinois Department of Financial and Professional Regulation report. The average finance charge offered since the reform law was $15.36 per $100 loaned.

Because of the reforms, “consumers are better protected from falling into an endless cycle of debt,” Gov. Blagojevich said in a statement.

“It’s clear that the law is working as intended,” said Bob Wolfberg, president of the Illinois Small Loan Association. He said the industry now makes less money off bad credit cash loans, which has forced lenders to offer different products, including longer-term loans.

On average, 45,000 to 60,000 payday loans are issued in Illinois every month. The law defined payday loans as loans for less than 121 days. Statistics on payday loans have only been kept since the law passed in December 2005, so it’s not clear if there’s been a big drop since the law passed.

The state financial regulation department has pushed rules that would eliminate the loophole, so that longer-term no fax payday advance loans could also fall within the law.

Department spokeswoman Sue Hofer said the department hopes Tuesday’s report will “stir some discussion.”

This entry was posted on Wednesday, August 1st, 2007 at 5:14 pm and is filed under Illinois.