When an emergency pops up and funds are tight, where do you turn? Many people turn to payday loans to cover the gap. According to the Consumer Financial Protection Bureau, some 12 million borrowers take out payday loans every year.
Payday loans can help in a crunch, but with average annual percentage rates nearing 400%, they’re not the most borrower-friendly option. And they’re not available in all states. In 2010, the National Credit Union Administration enacted a rule giving federal credit unions the option to give members payday alternative loans, or PALs.
What Is a Payday Alternative Loan?
Payday alternative loans are small, short-term loans offered by federal credit unions. As the name suggests, PALs are designed to be an alternative to expensive and often predatory payday loans.
PALs offer borrowers a longer repayment term and cap APRs at 28%. There are two types of PALs available: PAL I and PAL II. To access a payday alternative loan, you must be a member of a federal credit union that offers them. That most likely won’t be an issue, as many credit unions are open to anyone regardless of where they live or work.
[READ: Best Credit Cards for No Credit.]
Why Do We Need Alternatives to Payday Loans?
Payday loans offer quick cash but at a high cost. These loans, which are typically $500 or less, carry astronomical APRs. For example, a two-week payday loan with a typical fee structure of $15 per $100 borrowed carries an APR of nearly 400%, according to the CFPB.
Borrowers in some states may incur even higher costs. Researchers at the Center for Responsible Lending found that APRs on a $400 single-payment payday loan could be as high as 572% in Mississippi, 652% in Missouri, and 662% in Texas. But it’s even worse than that, because 80% of payday loans are not repaid by payday. Instead, the borrowers roll them over and pay another set of fees.
“The rolling over of these loans is one of the things that creates real problems for people. And one of the reasons people are so against the payday lending industry … they allow you to just roll over the loan without paying it back and then what that does is it creates more debt and puts the person in what they call the debt trap,” says Kevin Cohee, chairman and CEO at OneUnited Bank.
The CFPB claims that many borrowers pay more in fees than they originally borrowed.
PALs vs. Payday Loans
Payday alternative loans and payday loans both offer small loan amounts with no credit check. But there are some key distinctions, illustrated by the table below.
| Loan information | Payday Alternative Loans (PALs) | Payday Loans |
| Lender | Federal credit unions, membership required | Payday lenders at storefronts or online |
| Loan amounts | $200 to $1,000 with PALs I, Up to $2,000 with PALs II | Typically $500 or less |
| Annual Percentage Rate (APR) | Up to 28% | Up to 400% |
| Repayment term |
1 to 6 months with PALs I, 1 to 12 months with PALs II |
2 to 4 weeks |
| Credit requirements | No credit check | No credit check |
| Fees | Application fee up to $20 | Payday loan fees, rollover fees, and late fees, which can vary |
How Do Payday Alternative Loans Work?
Payday alternative loans help federal credit union members handle short-term emergency financing needs.
“The goal is for our members to utilize this product as a short-term solution rather than a long-term loan. It’s really just to assist them to meet their financial needs that are not covered before their next payday period,” says Leah Evans, director of product management at Georgia’s Own Credit Union.
You can apply for a PAL if your credit union offers them. While a credit check isn’t required, showing proof of income is, so have recent pay stubs or tax returns ready.
If approved, you’ll receive the funds fairly quickly, typically on the same day. Then you’ll repay the PAL according to its terms. You may be required to have your paycheck directly deposited with the credit union to be eligible for a PAL.
There are two types of PAL: PALs I and PALs II
PALs I
The PALs I loan size is similar to that of a typical payday loan. Here are the specifics:
— Maximum application fee of $20
— Loans between $200 and $1,000
— Loan terms of one to six months
— APRs capped at 28%
— Must be a credit union member for at least a month
— No rollovers allowed
— Maximum of 3 PALs per six months
— May have overdraft fees
PALs II
PALs II loans became available to federal credit union members starting in 2019, bringing additional flexibility to these emergency loans. Key features of PALs II loans include:
— Maximum application fee of $20
— Up to $2,000 loan amount (no minimum)
— Loan terms of one to 12 months
— APRs capped at 28%
— Immediate eligibility upon membership
— No rollovers
— Maximum of 3 PALs per six months
— Overdraft fees are not allowed
[Read: Best Personal Loans.]
Similar Loans
PALs are only available to federal credit union members. But other types of lenders offer similar products.
Other no-credit-check loans. Some non-credit union lenders offer short-term loans that don’t require a credit check and have better APRs and terms than payday loans. For example, OneUnited Bank says the APR on its CashPlease personal loan is 47%, compared to 391% for a comparable payday loan.
Paycheck advance. You could ask your employer for an advance on your paycheck, or use a service like Earnin to get your paycheck direct deposited two days early. Many banks also now offer early direct deposit on your paycheck.
Loan apps.Several loan apps offer short-term funding similar to payday loans. These loans may not have APRs as high as payday loans, but they can still be very high, ranging from 150% to 300%.
Cash advance. Many credit cards offer cash advances, but these usually come with costly fees and a higher APR than you’d pay on regular purchases. Repayment is very flexible, though. If you’re in a bind, you can make a minimum payment instead of rolling over a short-term loan.
How to Qualify for a PALs Loan
To qualify for a PAL, you must be a member of a federal credit union. Credit unions do have eligibility requirements and some offer membership based on where you live or work. You can find a local credit union using the NCUA credit union locator.
If you’re seeking a PAL I, you must be a member for at least a month. A PAL II does not have this requirement. Typically, you must become a member by opening an account and making a deposit. Unlike traditional loans, PALs don’t require a credit check. Instead, the credit union looks at your income.
“We do not pull credit for this type of loan. Only if they want to apply for a traditional personal loan, we just view that they have their payroll still coming into our institution, it’s been recent, and if they’re still able to afford that payment with their next payroll deposit,” says Evans.
Good to know: Institutions vary in how or if they report PALs repayment to credit bureaus.
PALs Loan Application Process
If you’re a federal credit union member and are in a pinch, see if your institution offers PALs. If so, you can likely apply online or at your branch. Applying online can speed up the process. For example, you may be able to log into your online account and submit a quick application. While your credit isn’t checked, your income typically is, so have pay stubs handy.
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