What Is a Payday Alternative Loan?
Payday alternative loans (PALs) are small, unsecured loans that are only offered by federal credit unions. These loans were designed to give consumers a more affordable alternative to predatory payday loans, which carry high APRs and short repayment terms.
Payday alternative loans from credit unions have a maximum APR of 28% and offer months-long repayment terms. However, most credit unions do not offer PALs, so one of the best ways to find this type of loan is to call your local credit union to ask if they offer them.
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Payday alternative loan terms: What to expect
Payday alternative loans are regulated by the National Credit Union Administration (NCUA), which created the PALs program in 2010 to give consumers an alternative option to high-cost payday loans. A credit union may also refinance a member’s existing payday loan into a PAL I loan.
The NCUA defines the terms for two types of payday alternative loans, PAL I and PAL II:
PAL I:
- Loan amount: $200 to $1,000
- Loan length: 1 to 6 months
- Max APR: 28%
- Fees: Maximum $20 application fee
- Waiting period: Must be a credit union member for at least one month to qualify
PAL II were introduced in 2019 with more flexible terms:
- Loan amount: Up to $2,000
- Loan length: 1 to 12 months
- Max APR: 28%
- Waiting period: No month-long regulatory period for borrowers
Comparing PALs to payday loans
As the name suggests, payday alternative loans were designed to be a better option to payday loans. However, obtaining PALs can pose challenges for even the savviest loan borrower. Here are a few takeaways when comparing the two:
| Payday loans | Payday alternative loans (PALs) | |
|---|---|---|
| What is it? | A small-dollar loan from a payday lender that doesn't require collateral | A small-dollar loan from a federal credit union that doesn't require collateral |
| Loan amount | Typically $500 or less | $200 to $2,000 |
| Loan length | 2 to 4 weeks | 1 to 12 months |
| APR | ~400%, depending on state regulations | Up to 28% |
| Fees | Rollover fee | $20 max application fee |
PALs cost less than payday loans
Subprime-credit consumers who would not qualify for a traditional loan may be tempted to borrow a payday loan, since payday lenders usually don’t require a credit check. However, payday loans are very expensive to borrow: a typical two-week payday loan with a borrowing fee of $15 per $100 has an APR of nearly 400%, according to the Consumer Financial Protection Bureau.
On the other hand, payday alternative loans have an APR cap of 28%, which limits the cost of borrowing. This gives consumers a less expensive way to borrow a small amount of money when compared with payday loans.
PALs have longer repayment periods than payday loans
Another benefit to PALs when compared with payday loans is the repayment period. While payday loans must be repaid in full just a few weeks after the loan is issued, PALs can be repaid over several months. This breaks up the loan into small, manageable payments, and it gives the borrower more time to repay the cost of the loan.
Because payday loans come with such short repayment periods, many borrowers will “roll over” their existing payday loan into a new loan, incurring new fees and increasing the cost of borrowing. In fact, four in five payday loans are rolled over, according to the most recent data from the CFPB.
The NCUA has regulated PALs so that consumers don’t get trapped in a cycle of reborrowing:
- Only one PAL may be issued at a time.
- No more than three PALs may be issued in any rolling six-month period.
- PALs may not be rolled over.
Payday loans are easier to access than PALs
PALs have one primary drawback: You must be a member of a federal credit union to qualify, and most credit unions do not offer PALs. This can make them difficult to find. Conversely, one of the things that makes payday loans so alluring is that they’re relatively easy to access, with thousands of storefront payday loan lenders across the states where they operate.
Another hurdle to jump for prospective PAL borrowers is the waiting period. For PALs I, you must belong to the credit union for at least one month before borrowing. However, you can borrow PALs II as soon as you become a credit union member, making them a better option for people who need fast cash in an emergency.
Where to find a payday alternative loan
PALs are only offered through certain federal credit unions. However, each credit union has its own set of membership requirements, and many of the larger credit unions with relaxed membership requirements do not offer PALs.
This can make PALs difficult to obtain for people whose local credit union doesn’t offer PALs, and who wouldn’t qualify for membership at a credit union that does offer them.
How to apply for a payday alternative loan
Join a credit union that offers PALs
To join a credit union, you must meet the membership requirements. These can include:
- Living in a certain area
- Working for a certain company
- Belonging to a certain religious organization
Some online credit unions have more relaxed rules. You may be able to join certain credit unions by donating to a specific charitable cause or by simply depositing money in an account, for example.
Applying to become a member of a credit union near you may be as simple as filling out an online form, but some credit unions require that you apply in person at a branch. When it comes to admitting new members, each credit union has its own process.
Apply for a PAL through the credit union
Just as federal credit unions have their own way of accepting new members, they also have their own way of issuing loans. While some credit unions may let you apply for PALs online, it may be simpler to call others or simply visit a branch to get started.
During the application process, expect the credit union to ask questions about your finances, such as income and employment. Depending on the credit union, they may conduct a credit check, as well.
Receive your funds and repay the loan over time
If approved for a payday alternative loan, you’ll receive the money you need to cover immediate expenses. Depending on the type of PAL you borrow, you may have up to a year to repay the loan.