A working draft of an independent academic study of the effects of the 2021 Illinois Predatory Loan Prevention Act (PLPA), finds that thousands of Illinois consumers no longer qualify for small dollar installment loans, leaving them without credit options. The study also finds that if subprime borrowers do qualify for a small dollar loan, they do so only because the loan amount is for more than they otherwise may want or need.
The study by Bolen, Elliehausen and Miller, uses credit bureau data to estimate the effects of the Illinois Annual Percentage Rate cap on unsecured installment loans. It compares data for Illinois with that for neighboring state Missouri – a state without any legislated APR cap. It finds that:
- The APR cap decreased the number of loans to subprime borrowers in Illinois by 44 percent.
- The APR cap increased the average loan size to subprime borrowers in Illinois by 40 percent.
The welfare effects of the loss of credit access were also assessed. An online survey of short-term, small-dollar-credit borrowers in Illinois showed that:
- Most borrowers answer that they are now unable to borrow money when they need it.
- Only 11 percent of the respondents said their financial well-being increased following the APR cap.
- 79 percent answered that they wanted the option to return to their previous lender.
“Most borrowers answer that they have been unable to borrow money when they needed it following the imposition of the interest-rate cap.”
Illinois’ disaster of a lending law should act as a warning to all policymakers considering similar in their states.
SOURCE: Bolen, Elliehausen and Miller (2023)