In Illinois, a rate cap bill to address racial inequities and predatory lending signed into law in March has pulled automotive financing into the discussion, stirring up a debate among consumer advocates, auto lenders and dealers over consumer access to credit and credit-related products.
The measure, known as the Predatory Loan Prevention Act, places a 36 percent interest rate cap on all consumer loans of less than $40,000 and includes guaranteed asset protection products sold on vehicle purchases as part of the interest rate calculation — a major detail that makes the law significant for franchised dealers in the state.
The "all-in" APR law borrows heavily from the federal Military Lending Act, which uses the same 36 percent cap for service members and covered relatives but excludes motor vehicle financing from its coverage.
"They talk about the fact that this is geared toward payday lending and predatory loans, when in fact the scope of the statute is much broader," said Paul Metrey, senior vice president of regulatory affairs at the National Automobile Dealers Association. "They say it's consistent with federal law when, indeed, it's not."
Proponents say the law will save Illinois families more than $500 million per year in predatory fees and provide protections that cover more than 12 million people.
But auto finance experts warn the bill's use of the federal military annual percentage rate instead of the decades-old Truth in Lending Act APR distorts the cost of credit and could prevent consumers with low-credit standing from obtaining affordable installment loans.