Laws on Installment Loans in Illinois

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Banks, credit unions and other lenders offer installment loans in Illinois. Installment loans are for a variety of purchases ranging from automobile loans to appliances. The state refers to standard installment loans as consumer installment loans to separate them from other types of loans, including payday loans. In 2010, the state adopted new laws on installment loans as part of new regulations on payday loans

Definition

The state of Illinois defines consumer installment loans as loans for six months or longer. That places the loans in a different category in Illinois than payday loans, which must be repaid between two weeks and 120 days in Illinois. Usually, installment loans are for 12 months, increasing to 60 months or longer for automobile and recreational vehicle installment loans.

Interest Rates

Illinois state law caps interest rates at 99 percent on consumer installment loans for less than $4,000, according to the Chicago Tribune. The interest rate cap is 36 percent for installment loans of $4,000 or more. The Chicago Tribune reports that before 2010, Illinois did not have a cap on interest rates on installment loans. As a result, some borrowers were paying interest rates as high as 700 to 1,000 percent, according to the office of the governor. Illinois made changes to laws after consumer advocacy groups and others complained about loans with such high interest rates.

Balloon Payments

Illinois laws on installment loans also prohibit so-called “balloon payments.” A balloon payment allows a consumer to take out a loan with low monthly payments and a lump sum at the end (the "baloon payment"). The low monthly payments help consumers afford the loan initially, but some people struggle to make balloon payments. For example, an installment loan for an automobile could feature $99 payments for 47 months, with a $5,000 balloon payment due on the 48th payment. Under that scenario, people in Illinois unable to pay the balloon payment could face repossession of their vehicle or would have to refinance the balloon payment at possibly a higher interest rate. The state prohibited balloon payments as part of 2010 legislation.

Income Verification

Illinois loan firms must verify that people can afford loans that they are applying for. Illinois prohibits lenders from issuing a loan if the monthly payments would exceed 22.5 percent of the borrower’s gross monthly income. People applying for loans can verify their income by showing pay stubs or W-2 forms.

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