Under Illinois usury laws, written consumer loans are capped at 9% annual interest, oral or unwritten arrangements at 5%, and every consumer loan of any kind is subject to a hard 36% APR ceiling under the Predatory Loan Prevention Act. Cross the 36% line and the loan is void: the lender cannot collect principal, interest, or fees. A borrower charged unlawful interest can sue for twice the total interest, fees, and charges under the loan, plus attorney’s fees.
The Rate Caps in Illinois
Illinois sets the maximum interest rate by how the loan is documented and what kind of lender is making it.
When there is no written agreement fixing a rate, the default cap is 5% per year.1Illinois General Assembly. Illinois Code 815 ILCS 205 – Interest Act This comes up with informal loans between individuals and with creditors who tack interest onto an overdue balance without a prior written term.
For written contracts, the cap is 9% per year.1Illinois General Assembly. Illinois Code 815 ILCS 205 – Interest Act The same 9% ceiling applies to installment loans of $25,000 or less repaid over no more than 181 months.2FindLaw. Illinois Code 815 ILCS 205-4a – Installment Loan Rate
Sitting on top of everything is the Predatory Loan Prevention Act, effective in 2021, which imposes a 36% APR ceiling on all consumer lending regardless of loan type.3Legal Information Institute. Illinois Administrative Code Title 38 Part 210 Appendix A – Disclosure of 36 Percent Rate Cap The 36% cap is not limited to payday or title loans. Any lender making any consumer loan in Illinois is subject to it.
What Counts Toward the 36% APR
The APR calculation under the PLPA is more aggressive than the number most borrowers see on standard disclosure forms. It follows the Military Lending Act’s formula, which folds in fees that traditional APR disclosures leave out. Credit insurance premiums, participation fees, and application fees all count toward the 36% ceiling.4Illinois Department of Financial and Professional Regulation. Predatory Loan Prevention Act Frequently Asked Questions A lender advertising 30% interest can still blow through the ceiling once insurance and origination charges are added in.
The consequence of exceeding 36% is severe. The entire loan is void. The lender loses the right to collect not just the excess interest but any principal, fees, or charges connected to the loan.3Legal Information Institute. Illinois Administrative Code Title 38 Part 210 Appendix A – Disclosure of 36 Percent Rate Cap Many states just reduce an unlawful rate down to the legal maximum. Illinois takes the whole loan.
Which Loans Are Covered
The Interest Act’s 5% and 9% caps reach personal loans, consumer credit, promissory notes, and most private lending. The PLPA’s 36% ceiling then overlays all consumer lending, including payday loans, auto title loans, installment loans, and retail financing.
Retail installment contracts for furniture, appliances, and electronics fall under both the Retail Installment Sales Act and the PLPA. Any retail installment contract above 36% APR is void on the same terms as other consumer loans.5Legal Information Institute. Illinois Administrative Code Title 38 Part 216 Appendix A – Disclosure of 36 Percent Rate Cap
Merchant cash advances occupy a gray area. Providers structure these products as purchases of future receivables rather than loans and argue that usury law does not apply. Illinois courts look past the label. If the arrangement functions as a loan with a real repayment obligation, the provider cannot escape usury limits by calling it something else.6Illinois Courts. Eng v Tin Whether the “purchaser” bears any genuine risk of nonpayment is one factor courts weigh.
Who Is Exempt
Business Loans
Loans made for business purposes fall outside the Interest Act’s general rate caps. The exemption covers loans to corporations, partnerships, sole proprietors, joint ventures, limited partnerships, and trustees who own or operate a business. The statute defines a business as a commercial, agricultural, or industrial enterprise carried on for profit.1Illinois General Assembly. Illinois Code 815 ILCS 205 – Interest Act
Two conditions knock a loan out of the exemption. If the loan is secured by the borrower’s wages or salary, it is not a business loan no matter how the proceeds are used. Same result if it is secured by household furniture or personal goods. A business loan does not lose exempt status simply because the borrower also pledged a personal residence alongside business collateral.1Illinois General Assembly. Illinois Code 815 ILCS 205 – Interest Act Owning the home you live in does not, by itself, make you a business.
Banks and Credit Unions
National banks, federal savings associations, and federally chartered credit unions are not bound by Illinois’s caps. Under the National Bank Act and the Depository Institutions Deregulation and Monetary Control Act of 1980, these lenders can charge interest based on the state where they are chartered rather than the state where the borrower lives. A national bank headquartered in a state without usury limits can lend to Illinois residents well above 9% or even 36%. State-chartered banks with their main office or a branch in Illinois are likewise exempt from the Interest Act’s installment loan caps.2FindLaw. Illinois Code 815 ILCS 205-4a – Installment Loan Rate
When a Bank Sells the Loan to a Debt Buyer
Federal preemption protects the originating bank’s right to charge its home-state rate, but courts have split on what happens when the bank sells the loan. In Madden v. Midland Funding, LLC, the Second Circuit held that non-bank debt buyers cannot invoke the National Bank Act to shield themselves from state usury laws, because applying those laws to a buyer acting on its own behalf does not meaningfully interfere with the bank’s own lending powers.7Justia Law. Madden v Midland Funding LLC The Fifth and Eighth Circuits have gone the other way, holding a loan valid when made stays valid. The Supreme Court has not resolved the split. For Illinois borrowers, this most often matters when a collector is chasing an old credit card or personal loan account bought from a national bank at a rate above Illinois’s caps.
What a Borrower Can Recover
A borrower charged unlawful interest can recover twice the total amount of all interest, fees, and charges under the loan, not just the amount above the cap. Reasonable attorney’s fees and court costs are on top of that.8Illinois General Assembly. Illinois Code 815 ILCS 205 – Interest Act, Section 6 Courts calculate the recovery based on either the total interest called for by the contract or the total interest actually paid, whichever is greater.
For loans that break the 36% PLPA ceiling, the loan is void from the start. The lender has no legal right to collect anything connected to the transaction, including the principal originally advanced.3Legal Information Institute. Illinois Administrative Code Title 38 Part 210 Appendix A – Disclosure of 36 Percent Rate Cap The one safety valve: a bona fide error does not trigger penalties if the lender corrects it within a reasonable time.8Illinois General Assembly. Illinois Code 815 ILCS 205 – Interest Act, Section 6
How Long You Have to Sue
To bring an affirmative suit over illegal interest, you have two years from either the last scheduled payment date or the date the loan was fully repaid, whichever comes first.8Illinois General Assembly. Illinois Code 815 ILCS 205 – Interest Act, Section 6 On a five-year loan, that means you have until two years after the final payment.
The defensive version is stronger. If a lender sues you to collect, you can raise usury as a defense at any time. There is no time limit on using usury as a shield against collection, even after the deadline to file your own affirmative suit has passed.8Illinois General Assembly. Illinois Code 815 ILCS 205 – Interest Act, Section 6
Where to Report an Illegal Rate
Complaints about lenders charging illegal interest can be filed with the Illinois Department of Financial and Professional Regulation through its online complaint form. You will need the lender’s information, your account number, and a factual description of the issue with dates and prior contacts.9Illinois Department of Financial and Professional Regulation. Financial Institutions Complaint Form The Illinois Attorney General’s Consumer Protection Division also accepts complaints about deceptive and abusive lending.10Illinois Attorney General. Finance and Credit Concerns
Neither agency acts as your lawyer or adjudicates individual disputes. They can investigate and take regulatory action, but if you want the double damages available under the Interest Act, you have to file your own lawsuit.
Tax Consequences of a Recovery or Voided Loan
Money recovered in a usury lawsuit or settlement is generally taxable income. The IRS treats settlement payments as taxable unless a specific exclusion applies, and usury damages do not qualify for the personal physical injury exclusion that covers most tort recoveries.11Internal Revenue Service. Tax Implications of Settlements and Judgments The characterization matters, so how the settlement agreement labels what the payment replaces is worth attention.
If a court voids a loan under the PLPA and the lender writes off the balance, the canceled debt may also be taxable. Canceled debt is generally income in the year it is canceled.12Internal Revenue Service. Topic No 431 – Canceled Debt, Is It Taxable or Not Insolvency at the time of cancellation, or discharge in bankruptcy, can allow the canceled amount to be excluded on Form 982. On a voided loan where the full principal could become phantom income, that is a conversation worth having with a tax professional before the return is due.