Payday loans are a problem. Can a public bank be part of the solution?

When the coronavirus first posed a threat to Americans’ health and finances, Tiffany Moore of Forest Park went to an installment lender for the first time in hopes of financial relief.

The good news: She was approved a $ 9,500 loan to compensate for a tenant unable to pay rent on her property. The bad news: an interest rate of 35.989%

It was easy to sign a contract that brought temporary relief. However, when Moore realized that she would end up paying more than double the amount she borrowed, she paid off the loan early.

Payday loans, title loans, and installment loans with exorbitant interest rates can help borrowers get a grip. That remains the case even though the Illinois Predatory Loan Prevention Act now places a 36% cap on the annual percentage of interest that lenders can charge.

These exorbitant deals continue to proliferate in black and brown neighborhoods, as a report by Stephanie Zimmermann of the Sun-Times makes clear.

Legislators should think about how to facilitate access to credit for vulnerable communities without having to resort to high-interest credit.

Payday lenders caution that they serve high-risk neighborhoods and borrowers who other lenders avoid.

Yes, they provide a service you need. But what desperate borrower can get out of financial distress while borrowing at 36% interest rate?

Disinvestment cycle

The report highlights data compiled by the nonprofit Woodstock Institute that the major zip codes for payday loans were mostly black. The zip codes include 60619 and 60620 on the South Side, which are both 95.7% black and include Chatham, Avalon Park, Auburn Gresham, and Washington Heights. Postal code 60614, which also includes Lincoln Park and is 84% ​​white, showed the lowest incidence of payday borrowers.

“Consumers only need triple-digit interest loans if they are stuck in a disinvestment cycle. If it weren’t for that, they’d get a safer, more affordable product, ”said Brent E. Adams, senior vice president of Policy and Communication, Woodstock Institute. “These lenders depend on the divestment cycle and are irrelevant when communities thrive.”

In March, this editorial team supported the cap on payday loan interest rates and wrote that Illinois should impose it in fairness and for the sake of racial justice. Approximately 40% of Illinois borrowers ultimately disagree with payday loan repayment. Often they get caught in a debt cycle in which old loans give way to new ones.

Another step along the way could be to bring affordable banking services back to low-income neighborhoods that have suffered from divestments.

Congressmen have voted in favor of a pilot program of postal banking in rural and urban communities across America. The aim would be for the government to learn from the pilot and establish permanent banking services as part of the US Postal Service. The non-profit bank would offer cheap checking and savings accounts, mobile banking and low-interest loans.

State Representative Mary E. Flowers pushed the Community Bank of Illinois bill for over a decade, but continues to face opposition from bankers.

“Banks are in the business of making money, and this is where I propose lower interest rates for residents,” Flowers told us. “All I want to do is give credit to people they wouldn’t give credit to.”

We’re not being sold by the idea of ​​federal or state-level public banking. There are many unanswered questions about how the model works and the potential cost to the taxpayer.

But the idea of ​​a system that allows low-income borrowers with no bank account to meet their basic banking needs while getting access to small, low-interest loans is worth considering.

There is no reason to expect payday loan companies to agree to lower the 36% cap any further, if at all. Ed McFadden, a spokesman for the American Financial Services Association, points to a 2015 Federal Reserve poll that found lenders unable to break even on loans below $ 2,532 at an annual rate of 36%.

The public postbank business is not a direct solution, but it could help combat the predatory payday loan problem.

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