Payday loans are dangerous forms of credit that often take advantage of people at their lowest. Taking one out can easily cost borrowers much more than they originally borrowed and trap them in a cycle of debt. Instead, consider a payday alternative loan (PAL), a better option for meeting short-term financial needs.
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What is a payday alternative loan (PAL)?
PALs are similar to payday loans in structure and mechanics, but there’s one major difference — instead of using potentially shady lenders, PALs are given out through federal credit unions, making them much more affordable. Their purpose serves the same need: to loan small amounts of money to borrowers in need of cash for a financial emergency between paychecks.
Unlike payday loans that must be paid in full by your next payday, PALs are installment loans where you’ll have a payment plan. You might make monthly or bi-weekly payments over a specific loan term. No rollovers are allowed, and loans are repaid over about one to six months.
The pivotal difference in borrowing from credit unions as opposed to predatory lenders means that PALs have much more favorable terms, including lower, capped interest rates and more flexible repayment periods. Some important details to know include:
- The National Credit Union Administration (NCUA) strictly regulates PALs nationwide. Each credit union must make sure their loans meet the following criteria:
- Principal balances must be between $200 and $1,000
- Annual percentage rates are capped at 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.
- Credit 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
The application process is relatively simple. People don’t typically need a high credit score to qualify for a PAL. In fact, your credit history may not even be checked. Credit unions are primarily concerned with lending to 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. While there may not be a credit check, you may need to show pay stubs or bank statements to verify income. Pay stubs ensure 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.
Eligibility for a payday loan is easier than a PAL, but that often works against the borrower. Failing to repay payday loan debt will 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 credit union members can take out a PAL or PAL II. Borrowers can apply for a PAL II immediately upon joining the credit union.
The National Association for Federally-Insured Credit Unions breaks down the differences between PALs and 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 locate one that does. To find a suitable federal credit union, use this locator.
Credit unions where membership is open to everyone
While many credit unions have specific membership criteria, a few are open to everyone. Note that you will have to open an account, but many allow you to do this with as little as $10. Here are some of the best options.
What is a payday loan?
A payday loan is a short-term loan with an extremely high interest rate. The loans are usually for $500 or less. Payday loans in theory are meant to help a borrower in a time of desperation if they need cash for an emergency between paychecks. In practice, however, they act as predatory loans that take advantage of people when they are most vulnerable. The loan total can quickly get out of hand for borrowers due to the high interest rate. And with hidden fees often tacked on and multiple rollovers allowed, a $500 loan can turn into thousands of dollars owed, leaving borrowers trapped in an overwhelming cycle of debt. In fact, more than 90% of payday loan borrowers have said they regret their original loan.
Payday loans are also called cash advance loans, check advance loans, post-dated check loans, and deferred deposit loans.
READ MORE: What is a payday loan?
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 interest rates for PALs are much cheaper than for payday loans. The price difference can be enormous in states with no cap on payday loan rates.
Federal credit unions are also much more trustworthy than most payday lenders. They’re obligated to follow strict rules that protect the borrower. For example, credit union lenders can extend the repayment period when borrowers default on a PAL. 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 using a PAL will boost the borrower’s credit score, whereas normal payday loans can cause your credit score to nosedive.
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.
READ MORE: Payday loan interest rates
Other payday loan alternatives and loan options
There are several better financial alternatives that can help you get some quick relief at a lower cost than a traditional payday loan. Some of those options include:
- Personal loans: A personal loan, different than a payday loan, is a traditional loan you would take out from a bank or credit union. You’ll need to get approved for the loan from wherever you visit, but the interest rate will be much lower than that of a payday loan. Just make sure you ensure the lender is legitimate.
- Cash advance apps: Cash advance apps can allow you to take out a loan from your phone much easier than going through brick-and-mortar banks. These apps don’t charge interest. Instead, they rely on “tips” from borrowers, and some require a monthly subscription fee. Some of the top online lenders for this service include Dave, Cleo, and Brigit.
- Borrow from friends and family: If you have reliable and trustworthy people around you, you could reach out to them to borrow some short-term cash. Just ensure you establish a clear repayment plan with them to avoid any potential conflict.
- Take on extra work: If you can, taking on an extra job can be a great way to earn more income for whatever expenses are piling up.
- Peer-to-peer lending platforms: You could also take out a loan from a peer, AKA an everyday person you’ve never met. Sites like LendingClub offer this service that can make it easier and less intimidating to get a loan from a bank. There can also be benefits like lower interest rates and origination fees. Reddit also has a borrowing subreddit (r/borrow), where, once you’ve developed a certain amount of Reddit history, you can post loan requests and fellow Redditors will loan you some cash. Just be sure to check out the rules first.
- Credit-builder loans: A credit-builder loan is an installment loan meant to help you establish a good credit score and positive debt repayment habits. These are similar to any other personal or auto loan but are reported to credit bureaus directly to demonstrate your ability to be a trustworthy borrower. Self is an organization specializing in credit builder loans and can be a great place to start.
- Bad credit loans: Borrowers with low to no credit scores can utilize bad credit loans (even after bankruptcy), which offer traditional personal loans to you for your financial emergency. The difference is interest rates are usually much higher and the loan itself might be unsecured. Lenders such as Upstart and Avant are favorable to borrowers with bad credit.
- Credit cards: Credit cards — even secured credit cards — essentially function as short-term loans and can be a much better alternative to payday loans thanks to lower interest rates and the amount of time you can have before repayment. A big barrier to entry can be having a good credit score, however, especially for cards with a zero balance introductory rate.
- Debt consolidation loans: A debt consolidation loan is when the borrower’s loan amount is lumped into one loan with a reduced, flat interest rate to deal with. Borrowers will work with a 3rd party company to get their original debt taken care of and will repay that 3rd party the loan amount instead. This can help get a harassing lender off your back while granting you a more manageable loan plan going forward. You can use this consolidation calculator to get a preview of how your payments would work.
- Debt management plan: A debt management plan (DMP) is another method borrowers can pursue. A nonprofit credit counseling agency can develop a DMP that rolls all of your loans into a single debt with a lower interest rate. This can help make debt repayment more manageable. The difference to debt consolidation is there is no third party involved. The Federal Trade Commission (FTC) offers some good guidelines to use when choosing a credit counselor.
Looking for other alternatives to payday loans? Click here.
The bottom line
If you’ve been considering a payday loan to help with financial needs, explore all other options available to you first. A simple walk into your local credit union could result in you borrowing through a payday alternative loan instead, a much safer and smarter loan than a traditional payday loan, with all of the same benefits.
Beyond PALs, many different types of loans exist that can help you stay on your feet during tough times. Traditional payday loans shouldn’t even be a consideration with all these available choices. The next time you’re in dire financial need, make sure to explore any of the options listed above to get started on the path toward financial stability.
You’ll need to open an account at a qualified federal credit union first, but if you want a PAL II instead of a PAL, you can apply for it as soon as you join the credit union.
You can check your official credit score for free here. You can also check it through Experian, TransUnion, and Equifax, as well as your own personal credit card company, or sites like Credit Karma.
Most people turn toward payday loans when they are strapped for cash in a financial emergency. To prevent this, maintain an emergency fund savings account that holds a certain amount of cash to use just in case you need it. Try to set aside a portion of every paycheck into this fund, and only use it when you really need it.