Payday Alternative Loans, known as PALs, help small-dollar borrowers avoid the debt trap created by traditional payday loans.
PALs are regulated by the National Credit Union Administration, which created the program in 2010. The loans must be:
- Issued 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% and 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 to borrowers one at a time; borrowers may not receive more than three PALs within a six-month period.
Borrowers must provide recent pay stubs, identification and phone numbers.
Credit unions are typically aware of their members’ credit scores, but many say they don’t require PAL users to have good credit. They’re more interested in borrowers’ income and ability to repay, and report that members’ loyalty increases their likelihood of repayment.
But credit unions generally do report successful PAL repayments to the major credit bureaus, which helps borrowers improve their credit scores.
In 2016, one in five of the country’s 3,721 federal credit unions offered PALs.
Credit unions are made up of members of a group — employees of a specific company, members of a church or social organization, or residents of a neighborhood or city. “We like to say there’s a credit union for everyone,” says Vicki Christner of the Credit Union National Association.
Why Payday Alternative Loans are different
Credit unions are nonprofit, member-owned cooperatives that also make larger loans, such as house and car loans.
That’s a stark contrast with traditional payday lenders, whose high-cost, short-term loans are often the only products they sell. They make their money when borrowers who can’t repay the loans roll them over into new ones and pay additional “fees,” their term for interest. A typical fee for a payday loan is $15 per $100 borrowed; expressed as an annual percentage rate, that’s 391%.
The Consumer Financial Protection Bureau says 90% of the industry’s fees come from consumers who borrow seven or more times. And the National Credit Union Foundation estimates that 15 to 20% of credit union members have taken out a payday loan within the previous five years. That’s what led to the creation of the credit union payday alternative loan.
“I basically saw credit union members who were bouncing checks left and right … from the payday lenders,” says H.C. “Hank” Klein, retired president of the Arkansas Federal Credit Union, whose model loan was used to help develop a federal PAL. “I devised a product to help credit unions help members get out of these products.”
Credit unions exist to help members become more financially stable. PALs are structured to help borrowers make on-time payments, with low interest rates and no added fees.
“It’s really designed as a solution to make members’ lives easier and get them to more financial stability,” says Ben Morales, chief technology officer for the Washington State Employees Credit Union, which is open to anyone who lives, works or worships in the state. “Credit unions are very intent on making members successful. That’s by design.”
Payday Alternative Loan lookalikes
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-style loans. But if they aren’t PALs, they can only impose an APR of up to 18%, according to federal law.
That might seem like a good deal, but lenders often compensate for a lower rate by imposing higher application fees, which can drive up the total cost of the loan, or the effective APR.
For example, Unify Credit Union — formerly Western Federal Credit Union — offers a 0% interest payday loan, but it’s due within 30 days and has a $50 application fee. That brings the effective APR of a $200, one-month loan to 300%.
The terms of payday-style loans from state credit unions also vary. In 11 states, state credit unions must comply with federal credit union rules, and their payday loans might mirror PALs. In the rest, credit unions are bound only by the same state laws that govern all payday lending.
Still, credit union loans are generally considered safer than traditional payday loans from a storefront or online lender.
“I think I could safely say that if a consumer went to credit union for a short, small-dollar loan, they would always get a better deal than they would almost everywhere else,” says Mark Lynch, a senior program manager for the National Credit Union Foundation. “If that credit union does provide it, it will always be better than a payday lender.”
Borrowers searching online might find traditional payday lenders that have adopted the “payday alternative loan” language. The fine print will reveal that the lender isn’t a credit union and its loan terms are the opposite of consumer-friendly.
Credit unions require membership and a branch visit at least a month after joining to receive a payday alternative loan. No organization promising you an immediate online loan is a legitimate credit union.
Creative credit union alternatives
Both federal and state credit unions are also likely to offer creative alternatives to payday loans designed to help members succeed financially well past the life of the loan.
“The universe of ways to help a person who has challenged credit is endless,” says Andy Price, senior director of advocacy and counsel for the CUNA. “If someone comes in in need of a $200 or $300 loan, you’re going to find a way to help them.”
Some of these include:
- Savings loans: Savings loans help borrowers build emergency funds to prevent the need for additional payday loans. Say you need $500 cash. The credit union would issue you a loan for $1,000 instead. You’d receive $500 immediately, but wouldn’t receive the second $500 until you’d paid off the entire $1,000 loan. The credit union knows that the promise of savings motivates borrowers to pay off the loan and leaves them with a reward.
- Dedicated purpose loans: These loans have terms created to cover large, one-time expenses, so borrowers can avoid seeking payday loans. Self-Help Federal Credit Union, for example, offers a $680 to $1,000 immigration 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 loan: 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 essentially holds the money in a savings account until the loan is paid off. Although you don’t get the money until later, you’ve successfully paid off a loan on paper.