Payday loans aren’t a sustainable form of credit, especially for people already living paycheck to paycheck. They’re far too expensive to be safe and frequently trap borrowers in a cycle of debt. A payday alternative loan (PAL) is a much better option for meeting short-term financial needs.
What is a Payday Alternative Loan (PAL)?
PALs have structures and mechanics similar to payday loans. Their principal balances are relatively small, and their repayment terms are short. Borrowers should use them to fund small cash emergencies or to put food on the table while waiting for their paycheck.
There is one pivotal difference between the two loan types: Predatory lenders are typically the ones offering payday loans, but only federal credit unions can provide PALs. As a result, PALs have much more favorable terms, including lower interest rates and more flexible repayment periods.
The National Credit Union Administration (NCUA) also strictly regulates PALs across the country. Each credit union must make sure their loans meet the following criteria:
- Principal balances must be between $200 and $1,000.
- Annual percentage rates must be no more than 28%.
- Application fees must be under $20 and reflect the cost of processing the loan.
- Repayment terms must be between one month and six months.
- Borrowers must be credit union members for at least one month.
- Borrowers can only have one PAL at a time and no more than three within six months.
In 2019, the NCUA created a second type of PAL, called PALs II. They follow all the same rules that PALs do, except for the following:
- Principal balances can be any amount up to $2,000.
- Repayment periods can be between one and 12 months.
- Union members can apply as soon as they join the credit union (no one month waiting period).
PALs II have not replaced the original PALs. Both options are still available, but borrowers must choose between the two. It’s only possible to hold one type at a time.
How To Qualify For A Payday Alternative Loan
People don’t typically need a high credit score to qualify for a PAL. Credit unions are primarily concerned with lending people who can repay their debt.
Unlike payday lenders, the law requires federal credit unions to verify a person’s ability to pay before lending to them. They make sure that borrowers have stable employment or some other reliable source of income. Borrowers will also likely need to explain why they want to take out the PAL and pass a background check.
That means it’s probably easier to qualify for a payday loan than a PAL, but that often works out worse for the borrower. Failing to repay debt can only damage credit and lead to further financial pressure.
The biggest obstacle in qualifying for a PAL is usually gaining membership into a credit union that offers one. Remember, only union members can take out a PAL or PAL II.
Fortunately, there are plenty of federal credit unions across the country. Not all of them offer PALs, but it’s always possible to track one down that does. To find a suitable federal credit union, use this locator.
Payday Alternative Loans vs. Payday Loans
Payday alternative loans are superior to payday loans in almost every way.
First, they’re far less expensive. The application fees and effective interest rates for PALs are much cheaper than they are for payday loans. In states with no upper limit on payday loan rates, the price difference can be enormous.
Second, federal credit unions are much more trustworthy than most payday lenders. They’re obligated to follow strict rules that protect the borrower.
For example, when borrowers default on a PAL, union lenders can extend the repayment period. Payday lenders often force borrowers to take out a second loan instead, which just gives them an excuse to charge more fees.
Also, unlike payday lenders, credit unions report payments on their loan products to credit bureaus. That means responsible use of a PAL will boost the borrower’s credit score.
Credit unions may even provide financial guidance services to their members. Like credit counselors, they’ll educate their clients and help them stop relying on short-term loans like PALs.
The Best Path Forward
A payday alternative loan is one of the best options available to borrowers who need to cover their bills until they get their paycheck. They’re much safer than payday loans and provide most of the same benefits without the same risks.
PALs can even be a way to escape the payday loan trap since borrowers can use them to refinance out of an existing payday loan. Just remember, they’re still not a long-term solution.
Federal credit unions can charge interest rates up to 28%. That’s much lower than the typical payday loan rate, but it’s still not cheap. Use them only as a short-term tool. Borrowers should always prioritize improving their financial situation and credit scores to stop relying on PALs as soon as possible.