What Is a Payday Alternative Loan?

PALs, offered by federal credit unions, cost less than traditional payday loans and give borrowers more time to repay.

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Payday alternative loans, or PALs, allow members of some federal credit unions to borrow small amounts of money at a lower cost than traditional payday loans and repay the loan over a longer period.

These features can help borrowers avoid the potential debt trap created by high-cost, for-profit lenders.

What is a payday alternative loan?

PALs are regulated by the National Credit Union Administration, which created the program in 2010. The loans must be:

  • Issued only to borrowers who have been credit union members for at least one month.

  • Granted in amounts between $200 and $1,000.

  • Affordable, with a maximum annual percentage rate of 28%, including an application fee of no more than $20, which reflects the actual cost of processing.

  • Repaid fully after one to six months of installments; no rollovers allowed.

  • Provided one at a time to borrowers; borrowers may not receive more than three PALs within a six-month period.

In 2019, the NCUA added a second PAL option, known as PALs II, which has similar rules with the following exceptions:

  • Loans can be any amount up to $2,000.

  • Terms are one to 12 months.

  • There is no monthlong waiting period; borrowers are eligible as soon as membership is established.

How to qualify for a payday alternative loan

Many credit unions that offer PALs don't require users to have good credit. They're more interested in borrowers' income and ability to repay. You may be asked to provide proof of income when you submit your application.

Not all credit unions offer PALs. The best way to find out if your local credit union offers these loans is to visit its website or call. If you aren’t yet a member, you can also ask about eligibility requirements.

Credit unions, which are not-for-profit, member-owned cooperatives, can extend membership based on where you live, what religious organization you belong to, your employer, military service or other causes and associations you may be involved in.

There is usually a one-time membership fee, which can be as little as $5, and you may need to make an initial deposit to fund your account.

Why PALs are safer

Credit unions exist to help members become more financially stable, and PALs are structured to help borrowers make on-time payments, with low interest rates and no added fees.

That's a stark contrast with traditional high-cost, short-term payday loans. Payday lenders make money when borrowers who can’t repay the loans roll them over and pay additional “fees," their term for interest.

A typical fee for a payday loan is $15 per $100 borrowed; expressed as an APR, that’s 391%. Payday loans are usually due in two weeks. The typical borrower pays $520 in fees to borrow $375, according to the Pew Charitable Trusts.

Also, payday lenders do not usually report payments to the national credit bureaus unless you default, unlike credit unions, which are encouraged to report PAL repayments. A history of on-time payments can help build your credit.

Payday alternative loan look-alikes

Official PALs are offered by federal credit unions, but many state-chartered credit unions have similar products. And some federal credit unions that don't provide official PALs have their own versions of payday alternative loans.

Credit union loans that aren’t official PALs can have a maximum APR of 18%, according to federal law. That might seem like a better deal than a PAL at 28% APR, but lenders can compensate for lower rates by imposing higher application fees, which can drive up the total cost of the loan, or stricter eligibility requirements.

Borrowers searching online might find lenders that have adopted the “payday alternative loan” language, but the fine print will reveal that the lender isn’t a credit union and its loan terms aren’t consumer-friendly.

For a loan to be affordable, most financial experts agree the APR should not exceed 36%.

Creative credit union alternatives

Both federal and state credit unions have other loans that help members improve their finances and avoid payday loans. Some of these include:

  • Dedicated purpose loans: These loans have terms created to cover large, one-time expenses. Self-Help Federal Credit Union, for example, offers a $680 to $1,000 citizenship loan to help cover the cost of a citizenship application and legal fees, with terms up to 36 months at a 17.7% APR.

  • Deferred access or credit-builder loans: These loans help members improve their credit scores so they can qualify for less expensive loans in the future. A credit union issues the loan, but holds the money in a savings account until the loan is paid off.

Traditional credit union alternatives

Credit unions also offer more traditional financing products like personal loans and personal lines of credit.

With a credit union personal loan, you borrow the full amount you need upfront and pay interest on it. Compared to loans from banks or online lenders, credit union personal loans can be easier to qualify for and have lower interest rates, especially for fair- and bad-credit applicants.

A personal line of credit is similar to a credit card. You are approved up to a certain limit, but you borrow only what you need and pay interest only on what you borrow.

If you’re having trouble getting approved for an affordable loan, look for credit unions that are designated as community development financial institutions, or CDFIs. CDFIs, which focus on serving people in low-income communities, rely less on credit scores when providing financial products.

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