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, 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, for-profit lenders.
What is a payday alternative loan?
Credit unions can provide two types of payday alternative loans, according to the National Credit Union Administration (NCUA). Here are the requirements 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 cannot receive more than three PALs I within a six-month period.
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.
There is no limit on how many PALs II a borrower can have in a six-month period.
Borrowers are eligible as soon as membership is established.
Borrowers can have only one PAL at a time.
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 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, 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 payday alternative loans 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 them on time.
Payday alternative loans vs. payday loans
Payday alternative loans | Payday loans | |
|---|---|---|
Where offered | Credit unions | Storefront and online lenders |
Loan amounts | $200 to $1,000 or up to $2,000. | $500 or less. |
Repayment terms | One to 12 months. | Two to four weeks. |
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 many state-chartered credit unions have similar products. Federal credit unions that don't provide official PALs may have their own versions of payday alternative loans.
Federal credit union loans that aren’t official PALs can have a maximum APR of 18%, according to the NCUA. That may be a better deal than a PAL at 28% APR, but lenders may also impose 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%.
Small loans from banks and online lenders
Banks and online lenders also offer small-dollar loans at affordable interest rates.
Small bank loans
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 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.
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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 longer repayment terms of one year or more.
» COMPARE: Best small personal loans
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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