What is a Payday Alternative Loan? Here’s How to Get One

Need a PAL?

No, not that sort of pal. We’re talking about a Payday Alternative Loan (PAL) to pay for something that you can’t afford right now. If you need car repairs, have a washing machine that went on the fritz, or groceries that you can’t wait till your next paycheck to buy, don’t go to a payday lender.

A PAL can solve your problems. To learn why a PAL is a better option, read on.

Payday Alternative Loans vs. Payday Loans

There are some key differences. Payday alternative loans are loans for amounts of up to $2,000 that are only issued through federal credit unions. PAL interest rates are capped at 28%. Payday loans are small-dollar loans for a maximum of $500 that can have interest rates in the triple digits.

What You Need to Know About Payday Alternative Loans (PALs)

A PAL is a short-term loan with high-interest rates and annual percentage rates, offering a simple application process. All you need is proof of income and a bank account.

Currently, it’s common for a payday lender to count on a borrower’s inability to satisfy the repayment terms. The result is multiple loan rollovers that add on fees and always force borrowers into a vicious cycle of debt.

Payday alternative loans were created by the National Credit Union Administration in 2010 to help borrowers obtain a small loan that could be used for important financial needs without the high-interest rates as well as quick repayment requirements typical of traditional payday loans. One major point to keep in mind if obtaining a PAL is that you must be a federal credit union member.

Also, in September 2019, the NCUA approved a final rule allowing federal credit unions to offer a new second payday alternative loan, or PALs II. The NCUA stressed this loan doesn’t replace the original loan but is a second option available to federal credit union members.

What You Need to Know About Payday Loans

Payday loans are short-term, high-interest loans that you usually repay via direct debit to your bank account on your next payday. They’re usually not reported to the credit bureaus and therefore have easier qualification requirements than traditional loans.

Also, payday loans are small sums of money ranging from $100 to $1,500, installment loans allowing for higher loan amounts that could range from $200 to several thousand dollars.

Other Important Differences

  • Rollovers: PALs have a strict restriction against rollovers, while payday loans can be rolled over multiple times. Each time a large fee is added to the principal of the payday loan, making it more difficult to pay off in total.
  • Interest rates: The average interest rate for a payday loan is 391%. PALs’ maximum yearly interest rate is capped at 28%, which is lower than the interest rate on many credit cards.
  • Loan fees: Payday loan fees usually range from $10 to $30 for every $100 borrowed depending on various state laws. A fee of $15, for example, equates to an annual percentage rate (APR) of almost 400% for a two-week loan. This means that if you borrow $300 until your next payday, it will cost you $345 to pay it back. With payday alternative loans, the highest application fee you’ll pay is $25. While this may seem as if you’re paying more, payday alternative loans let you borrow more money for extended periods, which lowers the total cost to borrow.
  • Repayment timeframe: Payday loans are usually required to be repaid when the borrower receives their next paycheck. Typically, this happens about two weeks later, although it can be one month if using a paycheck such as Social Security. Depending on which PAL loan a person takes out, a repayment timeframe can be from one to 12 months.
  • Eligibility: Anyone with a regular paycheck can qualify for a payday loan. To qualify for a payday alternative loan, you need to join a credit union, locally or via online banking.

How to Qualify for a Payday Alternative Loan

Again, only those who have been a member of a federal credit union for at least 30 days are eligible to apply for the original payday alternative loan.

But don’t despair, a PALs II loan has no waiting period. Applicants of both loans must pay the application fee, which cannot exceed $25.

Join a Credit Union

If you aren’t already a credit union member, you’ll have to join one in order to apply for a PAL. Credit unions are nonprofit member cooperatives that function like banks. Some have eligibility restrictions, while some are open to everyone.

For example:

  • Bethpage Credit Union allows anyone to join, as long as they open a savings account with $5.
  • Consumers Credit Union allows anyone to join as long as they pay a $5 membership fee and open an online savings account. People who aren’t U.S. citizens are still eligible to open accounts with a Matricula Consular ID or permanent resident card.
  • Connexus Credit Union allows new members to join by making a $5 contribution to the Connexus Association.

Other credit unions are open to specific groups of people. For example:

The Pennsylvania School Employees Credit Union is open to anyone who:

  • Resides in a household with a current PSECU member
  • Works for a company that offers PSECU membership as a benefit
  • Is a member of an association that offers PSECU membership as a benefit
  • Currently attends or have graduated from a college that offers PSECU membership

Learn the Specific Credit Union Membership Requirements

Each credit union has its qualification requirements. For example, Veridian Credit Union lists direct deposit of paychecks and proof of income as qualifications of their PAL.

LG&W Federal Credit Union lists a variety of additional requirements to get a PAL through its organization. It requires the applicant to be at least 18 years old, has a six-month work history, and a payroll deduction to a savings or checking account at the credit union with a minimum amount of $100.00 monthly.

Additional PALs I Requirements:

Individuals who opt for the PALs I loan must take out a minimum of $200. The maximum loan amount is $1,000. The federal credit union will assign a term to the loan ranging from one to six months. While borrowers can ask for as many as three payday alternative loans in six months, second and third loans will not be issued until the previous loan is paid off.

Additional PALs II Requirements:

There is no minimum loan requirement with PALs II, but borrowers can’t withdraw more than $2,000. The loan term can range from one month to 12 months with only one PALs II loan being issued at a time.

You can’t open a second PALs II loan until the first one is fully paid off, but you can take out an unlimited number of PALs II loans in six months. The catch is you will need to keep paying the previous loan off first.

Do You Need Good Credit to Qualify for a Payday Alternative Loan?

Most traditional lenders will check your credit report, but for payday alternative loans, sometimes no credit check is performed. Instead, credit unions want your membership to be in good standing and make sure you can make the monthly payments. To verify your income, you’ll need to show pay stubs or checking or savings account statements.

Why are payday loans such a poor choice? Watch this to learn more:

Other Credit Union Loan Options

Both federal and state credit unions offer a wide variety of loans.

These include:

  • Dedicated purpose loans: This is a loan backed by securities and is usually used to purchase other securities under specific government regulations.
  • Deferred access or credit-builder loans: A credit-builder loan is an installment loan with fixed monthly payments, very much like a personal loan, auto loan, and mortgage. Payments you make toward your credit builder loan are reported to the credit bureaus and sometimes help establish a better credit score.
  • Credit union personal loans: Credit unions are usually community savings and loan cooperatives, where members pool their savings to lend to each other and help operate the credit union. All credit unions offer savings and loan accounts while usually larger credit unions may also offer additional products and services.
  • Personal line of credit: A line of credit is a preset borrowing limit that can be withdrawn and used at any time. The borrower can withdraw funds as needed until the limit is reached, and as money is repaid, it can be borrowed again in the case of an open line of credit. It is usually established between a financial institution like a bank and a client that establishes the maximum loan amount the customer can borrow.

What is a CDFI?

If you have poor credit and are unable to get approved for an affordable loan, some credit unions have been deemed Community Development Financial Institutions or CDFIs. These serve borrowers in low-income communities and often rely on credit scores.

Other Payday Loan Alternatives

There are several other types of loans that can help you get your debt under control and improve your overall financial situation.

Here are a few loan options:

  • Personal loans: An unsecured personal loan is a fixed-rate loan not backed by collateral and repaid in monthly installments over a specific term, typically 2 to 7 years. When you need money for a big expense or need to consolidate your debt, a personal loan might be an option. You can use the funds for anything. Check out your credit score, credit report, and debt-to-income ratio to see whether you’ll qualify.
  • Debt consolidation loans: Debt consolidation mixes multiple debts into a single payment via a personal loan or credit card and can save time and money.
  • Bad credit loans: A bad credit loan is sought by someone whose credit score isn’t high enough to receive a loan from a traditional financial institution. Bad credit loans are like personal loans. Individuals borrow money from lenders and pay the loan back in fixed monthly installments.
  • Nonprofit credit counseling: Credit counseling is a service that aims to help individuals get out of debt. Credit counselors may offer advice on managing money, adjusting financial habits, creating a budget, dealing with creditors, and planning to get out of debt.
  • Credit card cash advance or balance transfer: A cash advance lets borrow access available credit (not to exceed your credit limit) to deposit funds to the account or withdraw cash at an ATM. A balance transfer helps transfer higher interest rate balances to a credit card saving you money. (Note: you need good credit to be approved for a balance transfer offer.)

The Bottom Line

A payday alternative loan can be a great option for those who find themselves short of funds for a purchase, pay a bill, or simply need quick cash and don’t want to go to a traditional lender.

While PALs have a few stipulations, including credit union membership, they’re still pretty simple to obtain. Check with your employer to see if they’re partnered with a local credit union, or join one of the options with open membership. The small deposit you’ll have to make to open a credit union account will likely still be less than what you’d end up paying in payday loan fees.


Can I Have More Than One Payday Loan at the Same Time?

It’s not impossible. Many lenders aren’t quick to give out a second loan if a borrower already has one. That said, it is possible to get a second loan through a completely different lender. But this is a very bad idea. Instead, ask your lender about an Extended Payment Plan (EPP) or a Payday Alternative Loan. Or even try a cash advance app.

How Can I Check My Credit Reports?

You’re entitled to one free copy of your credit report a year from each of the three major credit bureaus. Order online from the authorized annualcreditreport.com, according to the website www.ftc.gov for your free credit reports or call 1-877-322-8228.

What is a FICO Score and Is It Different from a Credit Score?

FICO scores are used by lenders to assess credit risk, however other credit scores can also let you know where you stand. FICO scores are one type of credit score you can obtain because FICO is a company that creates specific scoring models used to calculate scores.

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