Today, there are about 23,000 payday lenders — twice the number of McDonald’s restaurants in the United States — across the country.
These lenders prey on people who need money immediately and don’t have time to seek better options.
But there’s a better alternative. Before you hit “Apply Now” for that payday loan, consider a Payday Alternative Loan.
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Key Points
- PALs allow you to borrow up to $2,000 and repay it over up to one year.
- Interest rates on PALs are capped at 28%, while payday lenders can charge up to 400% APR or even higher
- PALs are only available through credit unions
- Some credit unions have no membership requirements aside from a first deposit
How PALs and Payday Loans Compare
| PALs I | PALs II | Traditional payday loan | |
| Minimum loan requirement | $200 | None | $50 |
| Maximum loan amount | $1,000 | $2,000 | Depends on your state; some states have no maximum |
| Loan term | One to six months | One to 12 months | Is repaid from your next paycheck |
| Maximum interest rate | 28% | 28% | APRs can be higher than 400% |
| Maximum number of loans | Three in six months, but you won’t be approved for a new loan until the previous one is repaid. | No limit in six months but you won’t be approved for a new loan until the previous one is repaid. | In theory, one. However, some borrowers will borrow money from a second (or third) payday lender to pay off another payday loan |
| Rollovers allowed | No | No | Yes, but you’ll pay a fee |
| Is credit union membership required? | Yes, for at least 30 days | Yes, but you can apply for a loan the same day you join | No |
Disclaimer: Credit Summit may be affiliated with some of the companies mentioned in this article. Credit Summit may make money from advertisements or when you contact a company through our platform.
What You Need to Know About Payday Alternative Loans (PALs)
First, you must understand the difference between traditional payday loans and PALs.
Though they sound similar, they’re very different.
- Payday loans: Short-term loans with high-interest rates and annual percentage rates, offering a simple application process. All you need is proof of income and a bank account. Many borrowers are unable to repay their loans on time and are forced to roll over the loans into new loans while paying additional fees. They force borrowers into a cycle of debt.
- Payday Alternative Loans: Small loans issued through credit unions that are designed to help borrowers make ends meet but without the high interest rates or quick payment turnarounds of payday loans.
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 or quick repayment requirements of payday lenders.
In September 2019, the NCUA approved a new rule allowing federal credit unions to offer a new second payday alternative loan, or PALs II.
Pro tip: This loan didn’t replace the original loan. Instead, it was added as a second option available to federal credit union members.
One central point to remember is that you must be a federal credit union member to qualify for a Payday Alternative Loan. However, many credit unions offer membership online for creating an account with a small deposit, sometimes even less than $20.
How to Qualify for a Payday Alternative Loan
- PALs: To qualify for the original Payday Alternative Loan, borrowers must be a member of a Federal Credit Union and have been a member for at least 30 days.
- PALs II: Though borrowers still have to join a federal credit union, these loans have no waiting period.
Applicants of both loans must pay the application fee, which cannot exceed $25.
Join a Credit Union
As you can see, if you aren’t already a credit union member, you’ll have to join one to apply for any type of PAL.
Pro tip: Credit unions are nonprofit member cooperatives that function like banks.
Some credit unions have eligibility restrictions, like working for a certain company or in a specific industry, while some are open to everyone.
For example, these credit unions have minimal membership requirements:
- 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 only 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 has graduated from a college that offers PSECU membership
Each Credit Union has Different PAL Requirements
Each credit union has its qualification requirements, so once you choose a credit union, you’ll have to ensure you meet the requirements.
For example:
- Veridian Credit Union lists direct deposit of paychecks and proof of income as PAL qualifications.
- 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, have a six-month work history, and make a payroll deduction to a savings or checking account at the credit union with a minimum amount of $100.00 monthly.
Do You Need Good Credit to Qualify for a Payday Alternative Loan?
No. While most traditional lenders check credit reports whenever you apply for a loan, many Payday Alternative Loans are issued with no credit check at all.
Instead, you must meet the following requirements:
- Credit union membership in good standing
- Income verification (pay stubs and/or bank statements)
Why are payday loans bad? Check out this video to learn.
Other Credit Union Loan Options
Both federal and state credit unions offer a wide variety of loans.
These include:
- 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.
- Personal loans: Because credit unions are member cooperatives and therefore nonprofit, they tend to offer lower interest rates and better terms than traditional banks. Also, any origination fees they charge are generally lower.
- 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.
Other Payday Loan Alternatives
Several other types of loans can help you get your debt under control and improve your overall financial situation.
Here are a few other options:
- Cash advance apps: These apps offer small short-term loans of $500 or less that are repaid from your next paycheck, but borrowers pay no interest. Instead, you’ll pay a tip whenever you apply and may have to pay a small monthly membership fee. Some of the most popular options include Dave, Albert, Brigit or Cleo.
- Debt consolidation loans: Debt consolidation mixes multiple debts into a single payment via a personal loan or balance transfer 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. Badcreditloans.com and personalloans.com are good options.
- Credit card cash advance or balance transfer: A cash advance lets borrowers access their available credit (not to exceed the 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.
Pro tip: You’ll need good credit to qualify for a balance transfer credit card.
READ MORE: How to consolidate payday loans
The Bottom Line
A payday alternative loan can be a great option for those who are short of funds for a purchase, pay a bill, or 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.
FAQs
It’s not impossible. Many lenders aren’t quick to give out a second loan if a borrower already has one. Getting a second loan through a completely different lender is possible. 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.
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.
Lenders use FICO scores 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.
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.