Payday Loans in Illinois: Are They Legal and How Do They Work?

Illinois residents short of cash and low on credit might consider a payday loan to weather a financial emergency, like burst pipes or an unexpected job loss. 

But the Prairie State has such strong lending protections in place that payday loans as commonly defined, small-dollar, short-term, high-cost credit are effectively unavailable. 

Fortunately, if you live in Illinois, you have strong payday loan alternatives. In this guide, we’ll cover Illinois’s payday lending laws and your short-term credit options. 

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Are payday loans legal in Illinois?

Payday loans are technically legal in Illinois, but they’re heavily regulated. 

For starters, the Predatory Loan Prevention Act (PLPA) of 2021 prohibits licensed state lenders from charging annual percentage rates (APRs) over 36%. If any lender violates these terms, the loan may be void and the borrower might not have to repay.

Second, the Payday Loan Reform Act of 2005:

• Limits payday loans to the lesser of $1,000 or 25% of a borrower's gross monthly income

• Sets a minimum loan term of 13 days and a maximum term of 45 days for standard payday loans

• Prohibits rollovers, meaning lenders can’t charge a fee for loan extensions or renewals

• Restricts simultaneous borrowing, as payday lenders can’t issue credit to a borrower who already has two outstanding payday loans

• Mandates a 7-day cooling-off period once a borrower has held a payday loan for 45 consecutive days

• Requires lenders to offer 55-day, interest-free repayment plans to borrowers who are struggling to repay their payday loans after 35 days

These laws — and the 36% APR cap, in particular — have effectively ended payday lending in Illinois. Per the Federal Reserve Bank of Chicago, the 361 payday loan storefronts operating in the state at the time of PLPA’s passage shut down shortly thereafter. 

How payday loans work in Illinois

The Illinois Department of Financial and Professional Regulation (IDFPR) requires all state lenders to hold a license. 

Unlicensed lenders, including many online and tribal lenders, may be operating illegally, as are any payday lenders that violate Illinois’ usury laws by offering unsanctioned rates and terms.

If a lender were to legally extend short-term, small-dollar credit in Illinois, the process would generally involve the following steps.

• You apply by presenting a valid ID, proof of residence and, usually, proof of income, including pay stubs or a valid, active checking account.

• The lender reviews your information. Most skip traditional credit checks, but Illinois requires them to use a reputable consumer reporting service to verify you’re within the state’s payday borrowing limits.

• You receive and sign a written loan agreement that outlines its APR, total borrowing costs, due date and more.  

• You get your funds in cash, check, money order or electronic funds transfer. 

• You repay. The lender will typically deposit a post-dated check or automatically debit your bank account for the full amount on your specified due date. Illinois law only allows lenders to attempt automatic withdrawals twice.   

The risks and dangers of payday loans

Traditional payday loans are generally $500 or less, due 14 to 31 days from their origination date and carry triple-digit APRs of 400% or more. They’re heavily marketed to cash-strapped, bad-credit borrowers who can’t qualify for a traditional (and more consumer-friendly) loan.

These characteristics make them quite costly — and broadly associated with debt traps. According to research from the Consumer Financial Protection Bureau (CFPB), over 80% of payday loans are renewed within 14 days, and 15% of new payday loans are followed by at least 10 additional loans.

While Illinois caps the total costs of most consumer loans, cash-strapped consumers could still face significant challenges paying back debts in a short timeframe. If they default on a loan, they may face collection efforts, civil suits, garnishments and more. 

How to avoid the payday loan trap

That’s why, even at lower rates, short-term, high-cost loans are best avoided. These strategies can help you sidestep them:

• Create a basic budget that includes a line item for savings. Even auto-rolling $25 a month from checking to savings can build enough of a buffer against small-dollar emergencies.   

• Negotiate with service providers or creditors before borrowing to cover a pressing bill. Many offer hardship programs or extended repayment plans to customers experiencing an income gap or other financial pressures. 

• Contact 211. Calling 211 or visiting Illinois's 211 website can help you find local emergency assistance for food, housing, utilities and more.

When a payday loan might be the only option

A payday loan or other small-dollar, high-cost credit might be your only option if your credit is thin or poor and you need emergency cash. 

Financial emergencies generally involve time-sensitive expenses that threaten your health, housing or livelihood. For instance, say you’re facing immediate eviction or don’t have enough money for transportation to and from work, putting your job at risk. You might need to borrow to cover those expenses in between paychecks.

To minimize the potential damages associated with high-cost borrowing: 

• Know your rights. Lenders in Illinois can’t charge more than 36% in total fees and interest on most consumer loans. If they do, the loan is invalid and you might not have to repay it. 

• Set an alert for your loan’s due dates to ensure you have enough funds to cover any automatic repayments. That’ll help you avoid costly lender and bank fees. In Illinois, lenders can charge only a single $25 insufficient funds (NSF) fee and attempt to withdraw funds only twice.  

• Request a repayment plan. Under Illinois law, you’re entitled to one if you owe on a payday loan past 35 days. 

Safer alternatives to payday loans

Credit cards

A credit card may help you better manage cash flow as most come with a 21-day grace period. If you pay off purchases before this period ends, you can avoid accruing and paying interest

Credit card APRs are also lower than those of payday loans. Per the Federal Reserve, they currently average 20.97%.

Earned wage access

Earned wage access products let you tap wages you've already earned before payday, often fee-free.

Instacash from MoneyLion provides advances of up to $500 with no mandatory fees and delivery within 1 to 5 business days, and many employers also offer EWA through platforms like DailyPay or Payactiv.

Personal loans (banks or credit unions)

Personal loans typically carry APRs between 8% and 36%, with higher rates generally extended to borrowers with less-than-stellar credit. 

However, if you can qualify for one, they often offer longer repayment periods. Community Bank of Elmhurst, for instance, offers unsecured personal loans with 36-month terms.

Payday alternative loans (PALs)

Under a wide-sweeping National Credit Union Administration (NCUA) initiative, many credit unions offer these loans, which mimic certain payday loan characteristics (small-dollar, no credit check), but tout more favorable terms.

Community Plus Federal Credit Union in Rantoul, Illinois, for instance, offers PALs of up to $500 with 6-month repayment terms and an 18% APR. No credit check is required, but you must be a member for at least 6 months to qualify.

Credit-builder loans

Candidly, a credit-builder loan won’t cover a pressing cash shortage, but it can help you build or repair credit over time, so you can avoid payday loans in the future.

Heartland Bank in Bloomington, Illinois, for instance, offers credit-builder loans ranging from $500 to $1,500. It holds these funds in savings as collateral. You make monthly payments. The bank reports them to the major credit reporting agencies, then gives you access to the funds once the “loan” is fully repaid. 

Illinois-specific assistance programs

Illinois offers the following benefits programs to residents experiencing financial hardship:

• Illinois Homeless Prevention Program provides financial aid for mortgage, rent and utility payments, along with supportive services, to eligible families facing eviction or homelessness.

• Low Income Home Energy Assistance Program (LIHEAP) helps eligible families pay energy service providers. 

• Illinois Crisis Assistance Program provides expedited funds for rent, food, clothing and other household essentials for TANF-eligible families. 

The state also funds a network of Community Action Agencies that help residents cover rent, food, utility bills, employment training, financial counseling and more. 

Borrowing from family and friends

A close family or friend might be willing to cover your cash shortage, while sparing you fees and interest. To avoid misunderstandings, consider drafting a simple written agreement and tracking payments through a peer-to-peer app like Venmo, Zelle or Cash App.

Side hustles

Driving for rideshare or delivery apps could help you earn extra income, particularly in busy cities like Chicago or Springfield. You might be able to find same-day local work on jobs boards like Wonolo.

Conclusion

Payday loans are technically legal in Illinois, but a 36% APR cap and other stringent usury laws have pushed almost all payday lenders out of the state. 

Still, short-term, small-dollar credit at a 36% APR can prove risky, so if you live in Illinois and are facing a cash crunch, you might want to explore all options. These include credit union PALs, state assistance programs, earned wage access products, nonprofit credit counseling and personal loans for people with bad credit.

FAQs

What is the maximum loan amount I can borrow in Illinois?

The maximum payday loan amount in Illinois is the lesser of $1,000 or 25% of your gross monthly income.

What fees and interest rates can payday lenders charge in Illinois?

Under the PLPA, payday lenders in Illinois may not charge more than a 36% APR on any loan. Lenders can also charge a $1 verification fee and a single $25 NSF fee. Any loan with an APR above 36% is void and legally unenforceable.

How long do payday loans last?

Illinois payday loans must have a term of at least 13 days and no more than 45 days. The state prohibits rollovers and mandates a 7-day cooling-off period once you’ve held a payday loan for 45 consecutive days.

Will a payday loan affect my credit score?

Payday lenders in Illinois rarely report positive payment activity to credit bureaus, so borrowing from one is unlikely to help your credit. However, a payday loan can damage your credit if the lender reports negative information to the credit agencies, your debt is sold to a collections agency or it results in a lawsuit or garnishment.

Can I get a payday loan with bad credit?

Most payday lenders do not run traditional credit checks, so bad credit generally won't disqualify you. However, given the costs, it's worth exploring PALs, EWA products or other alternatives.

What should I do if I can’t repay my payday loan on time?

Under Illinois law, if you have been in debt for more than 35 consecutive days, you have the right to request an interest-free repayment plan. The plan gives you at least 55 days to repay in equal installments, with no additional fees. You can contact your lender before your due date to request one.

Sources 

• Ilga.gov - Predatory Loan Prevention Act (SB 1792, 2021)

• Ilga.gov - Illinois Payday Loan Reform Act (815 ILCS 122/1-1 et seq.)

• Chicagofed.org - New Evidence on Where Payday Lenders Locate Their Storefronts

• Idfpr.illinois.gov - Illinois Department of Financial and Professional Regulation website

• Consumerfinance.gov - What is a payday loan?

• Communityelmhurst.com - Personal Loan Website

• Cplusfcu.org - Personal Loan Website

• Hbtbank.com - Credit-Builder Loan Website