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New, tougher Illinois credit repair laws came into force in 2021, which effectively ban payday loans with excessively high-interest rates–but even a loan from several years ago could cause problems with your credit score.
Can disputed collections come back into play? Yes, the statute of limitations is ten years, so a collection agency or debt collector could pursue payment for a payday loan or sue to recoup the debt.
Illinois Payday Lending Laws
The Predatory Loan Prevention Act was enacted in 2021 and protects consumers from payday loan-style credit lenders, who often charge high-interest rates that are so elevated that borrowers have little prospect of ever paying back the debt.
Some of the headline changes include:
- Caps on annual percentage rates (APRs) of 36%
- Limited verification fees to a maximum of $1
- Capped insufficient funds charges of $25
- Maximum loans of $1,000, or 25% of the borrower’s gross monthly income
- The minimum terms are thirteen days, with a maximum of forty-five days
Borrowers cannot take out a short-term loan if they have more than one separate outstanding loan, and rollovers–where the borrower takes out a new loan to repay an existing debt–are banned. Before this new law, lenders were charging interest rates above 100%, with financing charges of $15.50 per $100 borrowed.
Maximum borrowing applies to all payday loans or similar short-term lending. For example, if an individual earns $3,000 per month, they can borrow up to $750. The upper limit is 25% of their gross monthly income, so the individual cannot borrow more than $750 at any one time–even if that debt is split between multiple lenders.
What Is the Problem With Payday Loans?
The concept of a payday loan isn’t in itself immediately problematic. Borrowers can apply for a small amount of credit in advance of their payday, with the intention of repaying the debt in full on that date. However, predatory lending has become the norm in the payday loans sector, with a long list of severe issues that can cause long-term credit issues and financial difficulties that some have never recovered from.
Examples include:
- Extremely high APRs–some lenders have recorded interest rates of 400%
- Lenders encouraging borrowers to roll over their loans, adding administrative charges every time, creating an ever-growing debt
- Aggressive debt collection techniques, threats, and extortion, where criminal enterprises and loan sharks enter into payday lending
- Irresponsible lending without secure credit checks, providing easy access to financing by borrowers who do not have the income to repay
Because payday loans are seen as ‘emergency’ financing, other credible lenders, such as banks and insurance providers, may be reluctant to lend to applicants with a history of payday loans on their file. Even if it has been several years since you used payday lending, this could affect your mortgage prospects, employment opportunities (in some sectors where credit checks are lawful), and access to affordable financing.
For more information about repairing your credit score following payday loans or for help improving your credit position while you still have payday loans on your file, be sure to contact The Phenix Group. We’ll help make sure your credit stays on track–schedule a free consultation today!