Recent Study Finds Illinois Rate Cap Reduced Access to Credit
A recent study found that the 36 percent interest rate cap on consumer loans imposed by the 2021 Illinois Predatory Loan Prevention Act (PLPA) decreased the availability of small-dollar credit and worsened the financial welfare of many consumers. The PLPA imposed the rate cap on consumer loans offered by any individual or entity except for banks and credit unions.
According to Ballard Spahr, the study used quarterly credit bureau data and survey results to evaluate the effects of the PLPA between Q4 2020 and Q3 2021. It compared data for Illinois with data from Missouri—which has no rate cap—to estimate the quantity and average size of unsecured installment loans that would have been made if the rate cap did not exist.
In the six months after the rate cap was imposed, the number of unsecured installment loans in Illinois rose by 15 percent, compared to 27 percent in Missouri. The number of loans made to subprime, high-risk borrowers who rely on unsecured installment loans covered by the PLPA decreased by 44 percent within the first six months of the rate cap imposition.
The 36 percent state rate cap reduced the volume of loans by 8 percent relative to the number of loans in the six months prior to its imposition. The number of loans to prime borrowers, however, increased by 20 percent, and the average loan size rose by 7 percent.
The study also found that the average loan size rose throughout all borrower risk categories after the rate cap was imposed, which is consistent with the idea that a bigger loan is needed to make smaller loans profitable at the 36 percent rate cap.
60 percent of respondents said that they hadn’t been able to borrow essential funds since March 2021, 39 percent reported that their financial well-being worsened after their previous lender stopped offering loans in Illinois, and 79 percent said that they wanted to have the option to return to their previous lender if they were in need.