What is a payday alternative loan?

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In a Nutshell

Payday loans are expensive. Many payday loans carry fees that could equal a massive annual percentage rate, sometimes even 400%. Payday alternative loans, on the other hand, are generally more-affordable small-dollar loans with a longer loan-repayment term — but their availability is limited to certain credit unions, and other restrictions may apply.

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Payday loans can be a source of fast cash, but you’ll pay a high price to get that money in hand. A payday alternative loan could be a lower-cost option.

Payday alternative loans typically have much lower fees and annual percentage rates than traditional payday loans. This lower cost may help you avoid a seemingly endless cycle of debt.

Payday alternative loans are offered by some federal credit unions. There are two types of payday alternative loans — one that we’ll refer to as a traditional PAL and another known as a PAL II, which the National Credit Union Administration approved in late 2019. Let’s review what you should know about both types of payday alternative loans.

You may have financial relief options during COVID-19. Learn more.



What is a payday alternative loan?

A payday alternative loan is a short-term small loan offered by some federal credit unions. These loans must fulfill certain requirements, according to the National Credit Union Administration, which regulates federal credit unions in the U.S.

Federal credit unions can offer two different types of payday alternative loans. Here are some rules for traditional PALs.

  • The interest rate can’t be more than 28%.
  • Credit unions can’t charge a higher application fee than necessary to cover the cost of processing an application (and no more than $20).
  • Borrowers are limited to loan-repayment terms of one to six months.
  • Loan amounts must be within $200 to $1,000.
  • Borrowers must be credit union members for at least one month.

The newer PAL II loans have some of the same rules, but there are a few differences.

  • The interest rate, for the time being, also can’t be more than 28%.
  • The maximum application fee is also limited to the cost of processing (no more than $20).
  • Loan-repayment terms range from one to 12 months.
  • Loan amounts can be as high as $2,000.
  • Borrowers must be credit union members but can apply as soon as they join.

A credit union can offer either type of loan to its members — but a member can only get an offer for one type at a time.

Individual credit unions may have different loan restrictions that fall within NCUA requirements.

Can you get a small loan with bad credit?

Payday alternative loans vs. payday loans

There are several key differences between payday alternative loans and payday loans, starting with who offers them.

Payday alternative loans are offered only by certain federal credit unions — member-owned nonprofit organizations regulated by the federal government that aim to provide financial products at reasonable rates.

Payday loans are often offered by for-profit online or storefront lenders that are often considered as practicing predatory lending.

Some other differences between payday alternative loans and payday loans include the cost of the loan, who may qualify and the amount of risk involved when you apply for the loan.

Loan amounts, fees and terms

You may be able to borrow more money with a payday alternative loan. While payday alternative loans are typically offered in amounts of up to $2,000, payday loans are usually for $500 or less.

And payday alternative loans generally cost less than payday loans. Payday loans can have fees ranging from $10 to $30 for every $100 borrowed — which can amount to an APR of up to nearly 400%. In contrast, the highest application fee for a payday alternative loan is $20.

You’ll typically get a longer repayment timeline with payday alternative loans, too — between one and 12 months. But payday loans typically must be repaid within two to four weeks.

Loan qualifications

If you’re thinking about applying for a payday alternative loan, keep in mind that you’ll need to be a credit union member for at least a month if you’re applying for a traditional PAL (though you can apply for a PAL II as soon as you join the credit union).

You’ll also likely need to demonstrate that you meet some basic financial qualifications, like disclosing the loan’s purpose or not having a recent bankruptcy.

Payday loans may be easier to qualify for, as lenders typically only look at whether you have an active bank account, proof of income and your age. But this may not be a benefit — payday lenders generally don’t consider whether you’re financially able to repay the loan, so you could find yourself in a situation where you borrow but then find repayment difficult.

Payday loans aren’t available in every state, since some state laws prohibit payday lending. And even in states that do allow it, payday lenders may opt out of lending thanks to statewide restrictions on payday loan interest rates and fees.

Rollovers

Traditional payday loans allow multiple rollovers, exponentially increasing the total cost of the loan. The Consumer Financial Protection Bureau found that almost 70% of borrowers take out a second payday loan within a month of their first, and 20% take out at least 10 or more loans. With each rollover, borrowers incur more fees and interest, which can trap them in debt.

If you’re looking for a less-risky loan option, a payday alternative loan could be the way to go. Since you’re limited on how many of these loans you can get at one time, you may be less likely to find yourself stuck in an endless cycle of debt.

How to apply for a payday alternative loan

To find a payday alternative loan, you’ll need to be a member of a federal credit union that offers them. You can find credit unions you may be eligible to join by using the MyCreditUnion.gov Credit Union Locator.

Credit unions have different requirements for membership, and they can set their own standards for who will be approved for a payday alternative loan within the NCUA’s regulatory rules.

Shop around and visit various credit union websites to see their specific requirements for payday alternative loans. Some credit unions even allow members to apply for these loans online.

What other borrowing options should I consider?

If you don’t want to apply for a payday alternative loan in an emergency, here are a few other options you may want to explore.

  • Payment plan — If you need money for something like medical bills or overdue utilities, contact your creditor as soon as possible. Explain your situation and be frank about how much you can afford per month. You may also qualify for a hardship assistance program if one is offered in your community, or you could try to negotiate the debt.
  • Credit counseling A fresh set of eyes on your budget may help you find “extra” money to pay off current obligations — and help keep you from accruing more debt in the future. Visit the nonprofit National Foundation for Credit Counseling to find help.
  • Payday advance apps — An app like Dave or Earnin may give you small advances. The amounts are relatively low (usually $100 to $500) but could help cover an emergency or a short-term situation.

Bottom line

If you want to borrow a small amount of money affordably, payday alternative loans from credit unions may be cheaper than payday loans. Just remember that if your credit union doesn’t offer PAL II loans, you might need to be a credit union member for at least a month, and sometimes longer, before you can be eligible to apply for a payday alternative loan. And as with any loan, be sure you can pay it back within the loan term before you apply.

But if you aren’t sure if a payday alternative loan would be a fit for your financial situation, alternatives like a credit-builder loan or credit counseling could help you improve your credit scores and strengthen your finances so that you may be eligible for loans or credit cards with lower interest rates in the future.


Loan relief options during COVID-19

If you’re seeking out a payday or payday alternative loan as a result of the coronavirus pandemic, you’re not alone. Many people are facing debt issues they’ve never encountered before.

But you may have some avenues for relief. We’ve compiled the following resources to help you find programs announced by the government, lenders, credit card issuers and more that may help ease some of your financial burden. Check out our summaries of those resources below.

Government relief measures

Relief measures from lenders and credit card issuers

General advice for paying down debt

If you’re looking for general tips on how to budget or navigate debt, we can help you with that, too. You can get started here.