Small-dollar Credit or Wealth-Stripping

For many Illinoisans, when money is tight, short-term or small-dollar loans have been a go-to. High-interest, small-dollar loans often provide access to high-risk cash at an extra cost in Black and Latino/a neighborhoods where bank access is limited, and lending practices are still discriminatory.¹ Sadly, many Black and other traditionally marginalized Illinois residents turned to these expensive loans to try to bridge the gap between wages and the actual cost of living. Corporate greed and sky-high interest rates have left many in worse situations than before.

Nationally, users of predatory lending fall into one of four categories, those with insufficient income who borrow frequently, those who borrow frequently because their checks come at a different time (and less frequently) than their bills, and those who have an unexpected or expected major expense (new water heater or computer).² However, research has shown most predatory loans end up being taken out again and again by the same lower-income individuals, part of a cycle of endless debt. The Consumer Financial Protection Bureau found that more than four out of five payday loans are re-borrowed within a month, and the majority of payday loans are borrowed by consumers who take out at least 10 loans in a row.³ Around 40 percent of those with misaligned cash flow and those with insufficient income take out more than six loans a year.⁴ In Illinois, from January 2012 to December 2020, 1,413,004 consumers took out 9,318,552 loans—an average of 6.6 loans per person.⁵ About 55 percent of Illinois’s reported consumer loan requests in 2019 were denied because the borrower already had too many loans or had a loan for too many days.⁶

“You don’t want to end up paying $1,000 for some gas, because of all of the interest. It was even worse than worrying about the house. The loan felt like a drip, drip, drip of a faucet, never-ending.” – Angie, former payday loan borrower

Individuals who earn less annually are more likely to live paycheck-to-paycheck, and as a result, are more likely to take out predatory loans than people with higher incomes. According to a 2012 Pew study, households making under $40,000 comprise 72 percent of payday borrowers.⁷ In 2020, the Financial Health Network found that roughly 50 percent of payday borrowers fall into the category of “financially vulnerable,” those who struggle with all aspects of their financial lives. The remaining 50 percent comes from a category they label as “financially coping,” those who only struggle with some aspects.⁸ Less research is available about borrowers of the other types of predatory loans like auto title loans and installment loans. However, in Illinois, borrowers of all four types of small dollar loans tend to be lower-income. Between 2012 and 2020, the average income of all Illinois small dollar credit borrowers was $33,542 per year. In the year of our analysis, 2019, 48.3 percent earned less than $30,000 per year and 78.6 percent earned less than $50,000 per year.⁹ Nationally, increasing income decreases reliance on payday lending: a $1 increase in the state minimum wage has been associated with a 40 percent drop in payday borrowing.¹⁰

It may come as no surprise then that around two-thirds of short-term borrowers either borrowed to cover a bill that arrived before payday or earned too little to cover basic expenses. Of these two groups, both primarily used loans to pay for basic living expenses.¹¹ One study found that 64 percent of online payday and installment borrowers used the loan to cover regular expenses.¹² A Pew study similarly found that the majority of payday borrowers do not use the funds for unexpected emergencies, but for recurring expenses such as rent, groceries, and utilities.¹³ One study found that states that expanded their Medicare access saw a 15 percent drop in payday, pawn, and check cashing services compared to states that didn’t, suggesting that the high costs of medical care can push people towards paying bills with high-interest loans.¹⁴