Gov. Pat Quinn signed a bill into law Monday capping the often exorbitant interest rates on short-term consumer loans.
The law regulates so-called "payday loans," which often have to be paid back within two weeks, and which have historically charged consumers exorbitant interest rates. The loans are often the only recourse available to low-income borrowers who need cash in hand and their through-the-roof interest rates can trap borrowers in a cycle of debt.
HB537 also creates restrictions on "consumer installment loans," which the law defines as lasting longer than six months.
The Chicago Tribune explains some of the new regulations:
Under the new rules, interest rates would be capped at 99 percent for consumer installment loans of $4,000 and less and at 36 percent for loans that are $4,000 or more. Previously, there were no limits on how much loan companies could charge in interest, and some borrowers were smacked with rates as high as 700 to 1,000 percent, according to Quinn's office.
Interest rates on payday loans also would be limited, with rates being capped at $15.50 for every $100 borrowed over a two-week period. Additionally, loan firms would have to verify that a borrower has the ability to repay a loan and would not be allowed to issue pay day loans if monthly payments would exceed 25 percent of a person's gross monthly income. That limit drops to 22.5 percent for those taking out longer consumer installment loans.
Attorney General Lisa Madigan, who was among the leaders in advancing the legislation, praised its passage Monday. But she continued to warn consumers that payday loans still have much steeper interest rates than those offered by banks and even credit cards.
The loans "will still be costly, and should only be used in emergencies and in the last resort," Madigan said.
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