When Cobi was 23 years old, he had a steady job, but it didn’t pay enough for him to save up and move out of his mom’s place on Chicago’s West Side.
He planned on supplementing his income with an additional job. To do so, he needed to buy a laptop and camera, but he didn’t have the money for those purchases.
When money was tight at home, his mom would get money at payday loan stores.
“She didn’t do them frequently, but I remember several times where she did,” said Cobi. “So you know I said, ‘OK… if she did them … why not?’ ”
We’re only using Cobi’s first name because he doesn’t want his current employer to know about his financial history.
Looking back, he said it wasn’t difficult for him to find a payday lender because there were a lot in his neighborhood. And it was a quick process: The worker that helped him didn’t ask him a lot of questions.
Cobi went in requesting $200 dollars, and he was offered $450. He took it knowing he would have to pay it back when his next pay check came in.
But then his mom got sick and was in the hospital.
When payday rolled around, he was surprised by the $600 charge in his bank account. He didn’t have the money, and his bank account went in the negative. His bank then charged him overdraft fees.
He didn’t know what to do.
Cobi had to ask himself, “Do I take care of my family or pay the bank back?”
Cobi said he didn’t have the money. The bank ended up closing his account because of lack of payment.
Payday loans are supposed to be small, short-term loans. They are available for people who need fast cash and don’t have access to another option, like a traditional bank or credit union. But these loans are also known to come with high interest rates, up to 400% in some cases.
“I think the process went a little too fast to the point where I don’t remember them putting an emphasis on the interest and how much it was going to be,” said Cobi.
Stories like Cobi’s pushed Illinois lawmakers to react. The state is now one of 18 that caps payday loan interest rates and fees after the Illinois Predatory Lending Prevention Act was signed into law by Governor JB Pritzker last month.
Illinois State Senator Jacqueline Collins represents parts of Chicago’s South Side and the south suburbs. She co-sponsored the measure and called these types of high-interest loans “predatory.”
“The legislation goes to cap payday loans at 36%, installment payday loans at 36% and auto title loans at 36%,” said Collins. “Even that I feel is predatory, but that’s the best we can do at this point.”
Collins says it’s not an accident these types of businesses set up shop in communities of color.
“It’s really a result of redlining and segregation, because what happened was that segregation really created the opportunities for economic exploitation,” said Collins. “We know that these communities of color were targeted because they didn’t have access to a traditional bank loan.”
Not everyone agrees that capping lenders is the right move.
Rickie Keys with Renewal Financial lobbied against the measure. He agreed that payday loans are predatory, but said the fallout of the new law could unintentionally hurt communities of color because there’s nothing to take their place.
“Banks are not going to step in to offer these services. Credit unions will not step in to offer these services. I believe that the installment lenders will try to make a go of it but eventually I believe they will go away,” said Keys. “The only options that will be available to consumers … will be bad options.”
Keys is worried the demand for these types of loans will remain, but the supply will dry up on the city’s South and West sides.
Andy Posner, Founder and CEO of the non-profit lender Capital Good Fund, believes lenders like his and other community lenders want to provide services, but they haven’t been able to compete.
“All these payday branches and others are in their community, they get flyers and advertisements,” said Posner. “So if you see the worst actors pull out of the space, it makes it a lot easier for the good players to acquire customers cost effectively.”
Posner said the new law levels the playing field and gives people alternatives.
“This is going to be really good, particularly in the middle of the pandemic, for families to be able to access credit without putting themselves into a debt cycle,” said Posner. “So now people are going to be looking for alternatives, and so it’ll be easier for us to find them because it won’t just be us looking for the customer.”
Cobi wishes he’d known about other options because taking out that loan affected every aspect of his life.
He’s still rebuilding his finances five years later.
“I had to find a landlord that took cash. I couldn’t live where I wanted to live. It seemed very small at the time but it started a chain reaction. I’m OK now, but it just took me a while to recuperate.”
Araceli Gómez-Aldana is a host and reporter at WBEZ. Follow her @Araceli1010.