What Is a Payday Alternative Loan?
A payday alternative loan (PAL) is a small-dollar loan offered by credit unions as a safer, more affordable option to payday loans. PALs have limits on fees, loan amounts and repayment terms that are designed to help make borrowing more affordable, especially for those with lower credit scores or a limited credit history.
The term “payday alternative loan” refers to a specific product that comes from a federally chartered credit union, but state credit unions often offer similar options under a different name.
- Payday alternative loans are small loans from credit unions that can help you avoid predatory payday loans.
- Payday alternative loans come with lower interest rates and better repayment terms than payday loans.
- You must be a credit union member to qualify for a payday alternative loan, and there may be a waiting period before you can apply.
What is a payday alternative loan (PAL)?
A payday alternative loan is a small personal loan from a federal credit union. They’re a substitute for payday loans, which usually have unfavorable terms, such as high fees, and are known for being predatory.
PALs are regulated by the National Credit Union Administration (NCUA), and, like payday loans, qualifying may depend more on your income rather than your credit score.
PAL annual percentage rates (APRs) are capped at 28%. In contrast, the APR on a payday loan can reach 400% or higher. PALs also have longer repayment periods than payday loans — up to six or 12 months compared to two to four weeks.
Credit unions can’t issue you more than one PAL at a time, or more than three PALs within any rolling six-month period.
There are two types of payday alternative loans: PAL I and PAL II. Credit unions may or may not offer both types.
| PAL I | PAL II |
|---|---|
|
|
How to qualify for a payday alternative loan
You generally don’t need good credit to qualify for a payday alternative loan, but you will need to show you have enough income to repay the loan.
You must also be a member of the credit union that offers the payday alternative loan. Some credit unions have strict membership requirements, while others make it fairly easy for anyone to join.
Should you get a payday alternative loan?
If you face a financial emergency and don’t have the cash on hand to cover it, a payday alternative loan may be a reasonable choice. That said, it may not be the only way to address your needs.
A PAL may be a good choice if you:
- Are a member of a credit union that offers PALs (or are willing to join one).
- Don’t need to borrow more than the maximum permitted for a PAL I ($1,000) or PAL II ($2,000).
- Have subpar credit but a regular income and face an urgent expense.
Consider another option if you:
- Need more than $2,000 to cover your costs.
- Have strong credit and can qualify for a better rate on another type of loan.
- Can find a way to cover your expenses without taking on new debt.
Pros and cons of a payday alternative loan
Payday alternative loans are better than payday loans. That said, they come with downsides and shouldn’t be the only option you consider when addressing a borrowing need.
Pros
- Available to consumers without strong credit scores
- Offer much better terms than payday loans
- Can provide funds quickly
Cons
- May charge APRs much higher than the average personal loan
- Require credit union membership
- Must be a member for at least one month for a PAL I
Payday alternative loans vs. payday loans
Payday alternative loans come with lower interest rates and longer repayment terms than traditional payday loans, making them easier to manage.
Also, PALs are issued by federal credit unions, which are regulated by the NCUA. Payday loans are issued by private payday lenders, and regulations vary by state.
| Payday loans | Payday alternative loans (PALs) | |
|---|---|---|
| What is it? | A short-term small loan from a payday lender that doesn’t require collateral | A short-term small loan from a federal credit union that doesn’t require collateral |
| Loan amounts | Usually $500 or less | $200 to $1,000 (PAL I) Up to $2,000 (PAL II) |
| Repayment terms | Usually two to four weeks | One to six months (PAL I), one to 12 months (PAL II) |
| APRs | Can be upward of 400% | Up to 28% |
| Fees | Renewal or rollover fees | Up to $20 application fee |
| Common borrowing requirements | Proof of income, valid identification, and a checking or prepaid card account | Credit union membership and proof of income |
- The flat-rate fees on payday loans can be the equivalent of paying 400% or more in interest.
- You might only have a few weeks to repay the loan.
- You could end up needing another payday loan to pay off the first one, trapping you in a cycle of debt.
Alternatives to PALs
Personal loans
Best for: People with good credit or those who need to borrow more than $2,000.
Compared to payday loan alternatives, personal loans usually offer higher loan amounts and longer repayment terms. Interest rates are also typically lower if you have good credit. They can be easier to find than payday alternative loans, but most require credit checks.
Borrowers with good credit may want to consider this option because they may qualify for a low interest rate. And although personal loans for bad credit can be expensive, they don’t require credit union membership.
Credit card cash advance
Best for: People with a credit card who need emergency cash right away.
With a credit card cash advance, you withdraw cash from your credit card at an ATM, bank branch or online.
You’re borrowing money from your credit card’s line of credit. This usually comes with a cash advance fee and an interest rate higher than what you pay for regular credit card purchases.
Because of this, a credit card advance is a poor option unless you’re in an emergency and need cash immediately.
Buy now, pay later
Best for: Necessary purchases you can’t afford now but can pay off within six weeks.
Buy now, pay later (BNPL) services — like Affirm and Cash App Afterpay — are available through many online retailers. As the name suggests, BNPL lets you pay off your purchase over time. Often, that means four payments spread out over six weeks without interest. If you miss one of your payments, though, you may see interest and late charges.
According to LendingTree’s buy now, pay later tracker, 68% of BNPL users say that these apps have led them to overspend. Over half say they’ve regretted a BNPL purchase.
Borrow from friends or family
Best for: People with loved ones willing to loan them money (as long as they can repay it on time).
If you have friends or family members who can loan you money, borrowing from them might be the best option. Some loved ones might lend you money interest-free, as long as you pay it back within an agreed-upon timeframe.
To avoid any miscommunication or strain on your relationship, agree on a payment plan together, put it in writing and make sure you can afford to repay the loan.
Negotiate with your creditor
Best for: People who need money to pay off specific debts
If you’re considering a PAL to help you cover another, existing debt, consider talking to the creditor before you take on another financial obligation. It’s possible your creditor will be willing to negotiate a payment plan or otherwise make your debt easier to pay off.
Frequently asked questions
Payday alternative loans may be easier to get than other kinds of loans because they typically don’t require good credit. If you’re not a credit union member already, though, you’ll need to join one that offers this product.
Every credit union sets its own minimum credit score criteria. Some may not have a credit score requirement at all. Generally, PALs are available to help lower-score borrowers avoid payday loans. Check with your credit union for any other specific requirements.
Federal credit unions are permitted to offer PALs. That said, you can find comparable products with many state credit unions.
If you’re already a member of a credit union, you could get funds as soon as the same day or within one or two business days. Check with your credit union for specific timeline information.
Get personal loan offers from up to 5 lenders in minutes