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What Are Payday Alternative Loans?

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

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Updated · 2 min read
Jackie Veling
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Kim Lowe
Edited by 
Head of Content, Personal & Student Loans
Nicole Dow
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Lead Writer & Content Strategist
Payday alternative loans, or PALs, are small loans offered by some federal credit unions that cost less than traditional payday loans and have longer repayment periods.
These features can help borrowers avoid the potential debt trap created by high-cost, short-term payday loans.

What is a payday alternative loan?

Federal credit unions can provide two types of payday alternative loans, according to the National Credit Union Administration (NCUA). Here are the guidelines for each.
PALs I
  • Amounts between $200 and $1,000.
  • Maximum annual percentage rate of 28%, including a maximum application fee of $20.
  • Repayment terms of one to six months.
  • Borrowers must be credit union members for at least one month to qualify.
PALs II
  • Amounts up to $2,000.
  • Maximum APR of 28%, including a maximum application fee of $20.
  • Repayment terms of one to 12 months.
  • Borrowers are eligible as soon as membership is established.
Borrowers can have only one PAL at a time, and no more than three in a six-month period.

How to qualify for a payday alternative loan

Many credit unions that offer PALs don't require good credit to qualify. They're more interested in the borrower’s 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, ask about eligibility requirements.
Credit unions are not-for-profit, member-owned cooperatives that 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.
» MORE: NerdWallet’s best credit unions

Why PALs are safer than payday loans

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 $10 to $30 per $100 borrowed, according to the Consumer Financial Protection Bureau, and payment is typically due in two weeks. If a lender charges $15 for a $100 two-week loan, that’s a 391% APR.
» MORE: What is predatory lending?
Also, payday lenders do not usually report payments to the national credit bureaus unless you default. The NCUA encourages credit unions to report PAL payments, meaning borrowers could build credit by making loan payments on time.

Payday alternative loans vs. payday loans

Payday alternative loans

Payday loans

Where offered

Credit unions.

Storefront and online lenders.

Loan amounts

Up to $2,000.

$500 or less.

Repayment terms

One to 12 months.

Two to four weeks.

APR

Up to 28%.

Can be 400% or higher.

Fees

Application fee up to $20.

Rollover fees can be around $15 per $100 borrowed.

Borrowing restrictions

No more than three loans in a six-month period.

Varies by state.

Credit reporting

Possible.

None.

Payday alternative loan look-alikes

Official PALs are offered by federal credit unions, but state-chartered credit unions may have similar products. Federal credit unions may also offer personal loans with amounts and repayment terms similar to PALs but that aren’t official PALs. These credit union personal loans cap APRs at 18% and may have stricter eligibility requirements than payday alternative loans.
Additionally, you may find online lenders that market their loans as alternatives to payday loans, but they aren’t regulated by the National Credit Union Administration and can have loan terms that aren’t consumer friendly.
Most financial experts say the APR on an affordable personal loan should not exceed 36%.
» MORE: Best personal installment loans

Additional borrowing options

Small bank loans

Your bank may offer small-dollar loans at affordable rates. For example, Wells Fargo, U.S. Bank and Bank of America have loans ranging from $100 to $1,000 and charge a small fee to borrow. Repayment is usually due in monthly installments over a term of about three or four months. To apply, you’ll need to be an existing customer with a checking account.
If you’re not sure whether your bank offers a small-dollar loan, call and ask what your borrowing options are.

Small online loans

Online lenders also offer small loans, including for borrowers with bad credit (629 credit score or lower). These loans start at $1,000 with repayment terms of one year or more.
Interest rates vary based on your credit score, but you can pre-qualify with online lenders to check your potential loan amount, rate and repayment term before you submit a formal application.
» MORE: How to get a personal loan

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Cash advance apps

Cash advance apps like Dave, EarnIn and Brigit let you borrow up to a few hundred dollars from your next paycheck with little required fees. This type of borrowing may come in handy if you’re in a pinch — but only if you’re able to meet your upcoming financial obligations with a smaller paycheck.

Buy now, pay later

“Buy now, pay later” payment plans are offered by many major retailers and let you split a purchase across several weeks — often as four biweekly payments with no interest. The ease in getting a BNPL plan can lead to overspending, so it’s best to stick with one at a time.

Family loans

A loan from a family member or friend can come with little to no interest and a longer repayment term than a payday loan. Just make sure both parties agree to how the loan will be repaid. Draft up a loan agreement and sign it to stay accountable to the plan.

Local financial assistance programs

Nonprofit organizations and charity groups may offer resources or financial help to people who are struggling to afford groceries, clothing, transportation, rent, utilities and other household expenses. Check NerdWallet’s list of local financial assistance organizations to find what’s offered in your state.
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Star rating categories

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Affordability 25%

We review lenders’ annual percentage rate offerings at least twice per year and the competitiveness of each lenders’ APR range. We also assess whether a lender charges an origination fee and any opportunity for borrowers to receive a rate discount.

Customer experience 20%

We consider the experience of the consumer trying to manage a personal loan, which means accessibility of customer service representatives, whether borrowers can choose and change their payment due date, and the ability to track their loan on a mobile app.

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Application process 15%

We consider the lender’s full application process, including a borrower’s ability to preview their loan offer via pre-qualification, whether basic loan information such as APR range and repayment terms are available and easy to find online and how quickly a loan can be funded after approval.

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NerdWallet’s review process evaluates and rates personal loan products from more than 35 financial technology companies and financial institutions. We collect over 70 data points and cross-check company websites, earnings reports and other public documents to confirm product details. We may also go through a lender’s pre-qualification flow and follow up with company representatives. NerdWallet writers and editors conduct a full fact check and update annually, but also make updates throughout the year as necessary.

Our star ratings award points to lenders that offer consumer-friendly features, including: soft credit checks to pre-qualify, competitive interest rates and no fees, transparency of rates and terms, flexible payment options, fast funding times, accessible customer service, reporting of payments to credit bureaus and financial education. Our ratings award fewer points to lenders with practices that may make a loan difficult to repay on time, such as charging high annual percentage rates (above 36%), underwriting that does not adequately assess consumers’ ability to repay and lack of credit-building help. We also consider regulatory actions filed by agencies like the Consumer Financial Protection Bureau. We weigh these factors based on our assessment of which are the most important to consumers and how meaningfully they impact consumers’ experiences.

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