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.Payday loans can be a source of fast cash when in a pinch, but they can also come with high costs that are difficult to escape. But a payday alternative loan, or PAL, could be a more affordable 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 PALs: the original (often called a traditional PAL) and a newer option called PAL II, which the National Credit Union Administration introduced in 2019. Let’s review what you should know about both types of payday alternative loans.
- What is a payday alternative loan?
- Payday alternative loans vs. payday loans
- How to apply for a payday alternative loan
- What other options should I consider outside of payday alternative loans?
- FAQs about payday alternative loans
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.
| Loan amount | Loan term | Interest rate cap | Application fee | Membership requirement | |
|---|---|---|---|---|---|
| PAL | $200–$1,000 | 1–6 months | 28% | No more than $20 | One month |
| PAL II | Up to $2,000 (no min.) | 1–12 months | 28% | No more than $20 | None |
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 usually 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 time you have to pay back the loan.
Payday alternative 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 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.
How to qualify for payday alternative loans
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 may be able to 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.
Payday loan rollovers
Traditional payday loans allow multiple rollovers, which extends the borrower’s loan for another pay period while charging an additional payday loan fee. This exponentially increases the total cost of the loan, considering that each fee added could be between 10% and 30% of the original loan amount.
The Consumer Financial Protection Bureau found that more than 80% of payday loans are rolled over or followed by another loan within 14 days. 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 National Credit Union Administration 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 options should I consider outside of payday alternative loans?
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 or assistance — 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 could be eligible for an extension on your due date or a payment arrangement. You may also qualify for a hardship assistance program if one is offered in your community.
- 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.
- Personal loan — If your credit history is sufficient, you may be able to qualify for a personal loan. Some lenders even offer same-day disbursement of funds. If you’re unable to qualify alone, you might consider seeking a co-signer who has good credit to increase your odds of approval.
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.
FAQs about payday alternative loans
Payday alternative loans from credit unions are one of the most affordable options. You could also look into borrowing from a local bank or online lender for a personal loan, depending on your credit history.
PALs are regulated by the National Credit Union Administration, and they’re designed to be a safe, lower-cost option compared to payday loans.
To get a PAL, you typically need to be a member of a federal credit union for at least one month — though a PAL II, if offered, doesn’t require a waiting period after becoming a member.
*Approval Odds are not a guarantee of approval. Credit Karma determines Approval Odds by comparing your credit profile to other Credit Karma members who were approved for the personal loan, or whether you meet certain criteria determined by the lender. Of course, there’s no such thing as a sure thing, but knowing your Approval Odds may help you narrow down your choices. For example, you may not be approved because you don’t meet the lender’s “ability to pay standard” after they verify your income and employment; or, you already have the maximum number of accounts with that specific lender.