May 13, 2021

Illinois rate cap bill would impact auto lending

An Illinois Senate bill that would place a 36 percent cap on interest charged on all loans extended in the state below $40,000 is drawing concern from dealership and auto finance leaders.

The Illinois Legislature passed SB 1792 on Jan. 13, which includes a provision titled the Predatory Loan Prevention Act, which some experts say limits credit access to consumers who fail to qualify for lower interest rate terms. It now goes to Gov. J.B. Pritzker for his signature.

The bill illustrates the tightrope regulators and government bodies walk in crafting rules that expand credit access for high-risk populations without burying those borrowers under insurmountable debt.

Several groups, including the American Financial Services Association and the Illinois Automobile Dealers Association, urged Pritzker to veto the bill, concerned that a third of Illinois adults — 3.5 million people — would be prevented from obtaining “safe and affordable” installment credit because of their low-credit standing if it became law.

Customers with low credit face greater hurdles to obtaining credit because of a high likelihood of default, for which lenders provision against by charging higher interest rates. AFSA said in a blog post that lenders undertake significant fixed costs before extending a traditional installment loan. Indirect lending, for example, includes fees for receiving applications, pulling credit bureau data and verifying income — all of which the lender pays before a loan is extended. These costs are built into lender business models and typically manifest as high interest rates charged on installment loans.

While the bill contains provisions aimed at creating a more equitable financing landscape in the state, “the proposed rate cap would leave Illinois consumers worse off and immediately cut off access to credit for those most in need,” the letter said.