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What Is a Payday Alternative Loan?

Key Takeaways

Payday alternative loans (PALs) are safer and more affordable short-term loans offered by some federal credit unions as an alternative to high-cost payday loans. PALs have lower fees, longer repayment terms, and no rollovers, helping borrowers avoid debt cycles. To qualify, borrowers must meet specific requirements and be members of a participating credit union. When considering any loan, borrowers should compare offers, review terms, and consider non-borrowing alternatives to protect their financial well-being.

What is a payday alternative loan?

A payday alternative loan (PAL) is a small-dollar, short-term loan offered by some federal credit unions as a more affordable and safer alternative to high-cost payday loans. PALs are designed to help credit union members bridge unexpected financial gaps without the predatory terms often associated with traditional payday loans.

The National Credit Union Administration (NCUA), which regulates federal credit unions, has established two types of payday alternative loans with specific rules and requirements:

PALs I:

  • Loan amounts can range from $200 to $1,000.
  • The loan term must be between 1 and 6 months.
  • The maximum annual percentage rate (APR) is 28%, which includes a maximum application fee of $20.
  • Borrowers can receive a maximum of three PALs I within a six-month period, provided no PAL overlaps or is rolled over.
  • To qualify, borrowers must be credit union members for at least one month.

PALs II (introduced in 2019):

  • Loan amounts can be up to $2,000 with no minimum.
  • The loan term ranges from 1 to 12 months.
  • The maximum APR is also 28%, including a maximum application fee of $20.
  • There is no limit on the number of PALs II that a borrower can have within a six-month period.
  • Borrowers are eligible as soon as they establish membership at the credit union, with no minimum waiting period.

It's important to note that a borrower can only have one outstanding PAL at a time, regardless of the type. Credit unions can choose to offer either PALs I, PALs II, or both to their members.

Payday alternative loans vs. payday loans

Criteria Payday Loans Payday Alternative Loans (PALs)
Description Small-dollar loans from payday lenders without collateral Small-dollar loans from federal credit unions without collateral
Loan Amounts Typically $500 or less Ranges from $200 to $2,000
Loan Duration 2 to 4 weeks 1 to 12 months
Annual Percentage Rate (APR) Approximately 400%, varying by state regulations Up to 28%
Associated Fees Rollover fees Maximum $20 application fee

While both payday alternative loans and payday loans can provide quick access to funds, PALs are a substantially more cost-effective and less risky option for borrowers. Here's a detailed comparison of the two:

Loan amounts, fees and terms

  • PALs offer loan amounts between $200 and $2,000, depending on the type. In contrast, payday loans are typically for smaller amounts, usually $500 or less.
  • PALs have a maximum APR of 28%, which includes the application fee. Payday loans, on the other hand, often carry APRs around 400% due to high financing charges.
  • Repayment terms for PALs range from 1 to 12 months, allowing borrowers to spread out their payments over a longer period. Payday loans are usually due in full on the borrower's next payday, typically within 2 to 4 weeks.

Loan qualifications

  • To qualify for a PAL, you must be a member of a federal credit union that offers these loans. Some credit unions may require a minimum membership period, often one month, before you can apply for a PAL. Payday lenders, in contrast, usually only require borrowers to have an active checking account, proof of income, and a valid ID.
  • Credit unions offering PALs assess a borrower's ability to repay the loan, taking into account their income, expenses, and credit history. Payday lenders often do not perform a thorough assessment of a borrower's financial situation, making it easier for borrowers to take on a loan they cannot afford.

Rollovers

  • PALs cannot be rolled over, meaning borrowers cannot extend the loan term by paying only the fees and not the principal. This restriction helps prevent borrowers from falling into a cycle of debt. Payday loans, however, often allow multiple rollovers, trapping borrowers in a cycle of mounting fees and making it difficult to escape the debt.

How to qualify for a payday alternative loan

To qualify for a payday alternative loan, you must meet the following criteria:

  1. Be a member of a federal credit union that offers PALs. If you're not already a member, you'll need to join one first. Use the NCUA's Credit Union Locator tool to find credit unions near you and inquire about their membership requirements and whether they offer PALs.
  2. Meet the credit union's specific PAL requirements, which may include:some text
    • Having a minimum credit score (though many credit unions don't require good credit)
    • Providing proof of income to demonstrate your ability to repay the loan
    • Having a minimum length of credit union membership (for PALs I)
    • Paying a small application fee (maximum $20)
  3. Ensure you have no outstanding PALs from the same credit union, as you can only have one at a time.

Keep in mind that while the NCUA sets general guidelines for PALs, individual credit unions may have additional requirements or may choose not to offer these loans at all.

How to apply for a payday alternative loan

Once you've confirmed your eligibility for a PAL, follow these steps to apply:

  1. Join a credit union that offers PALs if you're not already a member. This typically involves opening a share account (a savings account) and depositing a small amount of money (often $5 to $25). Some credit unions may have specific membership requirements based on your employer, location, or affiliations.
  2. Submit a PAL application, either online or in person at a credit union branch. You'll likely need to provide:some text
    • Personal information (name, address, Social Security number, etc.)
    • Income verification (pay stubs, tax returns, etc.)
    • Proof of identity (government-issued ID)
    • Credit union account number
  3. Wait for the credit union to review your application and make a decision. This process may take a few days, depending on the credit union's procedures.
  4. If approved, sign the loan agreement and receive your funds. You may get the money deposited directly into your credit union account or receive a check.
  5. Repay the loan according to the terms, usually in monthly installments over the agreed-upon term (1 to 12 months, depending on the PAL type). Some credit unions may require you to set up automatic payments from your account.

If your PAL application is denied, the credit union will provide an explanation. You may be able to reapply after addressing the issues that led to the denial, or you can explore alternative borrowing options.

Payday alternative loan look-alikes

In addition to federally regulated PALs, some state-chartered credit unions may offer similar small-dollar loan products with varying terms and interest rates. These loans may have more flexible requirements or offer different loan amounts and repayment terms. However, they may also come with higher interest rates (though still likely lower than payday loans).

Be cautious of other lenders offering products labeled as "payday alternative loans" that don't adhere to the NCUA's guidelines. These lenders may use the term to market high-cost loans that don't provide the same consumer protections as genuine PALs. Carefully review the loan terms, including fees, APR, repayment period, and rollover policies, to ensure the loan is truly an affordable and safe alternative to payday loans.

Other alternatives to payday loans

If you're unable to access a PAL or your credit union doesn't offer them, there are other lower-cost borrowing options to consider before turning to a payday loan:

Small bank loans

Some national banks, such as Wells Fargo, U.S. Bank, and Bank of America, offer small personal loans ranging from $100 to $1,000. These loans usually have lower fees than payday loans and offer more manageable repayment terms. To qualify, you may need to be an existing customer with the bank.

Small online loans

Online lenders, such as LendingClub, Upstart, and Prosper, provide personal loans with lower interest rates than payday loans. These loans often have minimum loan amounts around $1,000 to $2,000 and can be repaid over several months or years. Online lenders may have more flexible credit requirements, making these loans accessible to borrowers with less-than-perfect credit.

Before applying for any loan, compare offers from multiple lenders and carefully review the terms, fees, and repayment obligations. Also, consider non-borrowing alternatives, such as negotiating payment plans with creditors, seeking assistance from local charities or religious organizations, or tapping into emergency savings.

Bottom line

Payday alternative loans from federal credit unions can be a lifeline for borrowers facing unexpected expenses or short-term financial setbacks. By offering lower interest rates, longer repayment terms, and more consumer-friendly practices than predatory payday loans, PALs can help borrowers access the cash they need without the risk of falling into a debt trap.

A PAL may be a good fit for you if:

  • You're a member of a federal credit union (or are willing to join one) that offers these loans
  • You can demonstrate the ability to repay the loan with your current income
  • You need to borrow between $200 and $2,000 to cover emergency expenses or bridge a short-term financial gap

If a PAL is not available or doesn't meet your needs, explore other affordable borrowing options, such as small bank loans, online personal loans, or credit union signature loans. Exhaust all alternatives, including non-borrowing options, before considering a high-cost payday loan.

By understanding the features and benefits of payday alternative loans and other affordable borrowing options, you can make an informed decision when faced with a financial emergency. Choosing a safer, more cost-effective alternative to payday loans can help you manage short-term cash needs while protecting your long-term financial well-being.

FAQ

What is the difference between a payday alternative loan (PAL) and a traditional payday loan? 

Payday alternative loans (PALs) are offered by federal credit unions and have lower fees, longer repayment terms, and no rollover options compared to traditional payday loans. PALs are designed to be a safer and more affordable short-term borrowing option, helping borrowers avoid the debt cycles often associated with high-cost payday loans.

How do I qualify for a payday alternative loan (PAL)? 

To qualify for a PAL, you must be a member of a federal credit union that offers these loans. You will also need to meet specific requirements set by the credit union, which may include providing proof of income, demonstrating your ability to repay the loan, and having a minimum length of membership (for PALs I).

Can I get a payday alternative loan (PAL) if I have bad credit? 

Many credit unions offering PALs have more flexible credit requirements compared to traditional lenders. While some may require a minimum credit score, others may focus more on your income and ability to repay the loan. However, specific requirements vary by credit union, so it's best to contact your local credit union directly to discuss your options.

How much can I borrow with a payday alternative loan (PAL)? 

The amount you can borrow with a PAL depends on the type of PAL and the specific credit union. PALs I offer loan amounts between $200 and $1,000, while PALs II offer loan amounts up to $2,000. Keep in mind that individual credit unions may have their own limits within these ranges.

Are there any other alternatives to payday loans besides payday alternative loans (PALs)? 

Yes, there are several other alternatives to consider before opting for a high-cost payday loan. These include small personal loans from banks or online lenders, credit union signature loans, negotiating payment plans with creditors, seeking assistance from local charities or religious organizations, and exploring non-borrowing options such as tapping into emergency savings or adjusting your budget. It's essential to compare offers, review terms and fees, and consider all available options before deciding on a borrowing solution.

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