What's a Payday Alternative Loan (PAL), and How Can You Get One?
In recent years, lawmakers have taken action to eliminate predatory lending. By December 2023, sixteen states had banned payday loans, but there is still demand for short-term funding. In response to that demand, some federal credit unions offer payday alternative loans (PALs), regulated by the National Credit Union Administration (NCUA).
Most consumers are aware of payday loans; several news stories are published each year warning about their “predatory” nature. However, payday alternative loans (PALs) aren’t in the same category despite the similarity in the name. A PAL is a safer, more cost-effective alternative offered by federal credit unions. In this article, we’ll explain how they work.
What is a payday alternative loan (PAL)?
The NCUA allows federal credit unions to offer two types of PALs. PAL I’s are for amounts between $200 and $1,000, with a maximum APR of 28% and repayment terms of one to six months. PAL II increased the limit to $2,000 and the payment term to one to twelve months. See the chart below to learn how the two loan types compare.
| Loan Details | PAL I | PAL II |
| Lender | Federal Credit Union | Federal Credit Union |
| Loan Amount | $200 to $1,000 | Up to $2,000 |
| Length of Loan | 1 to 6 months | 1 to 12 Months |
| APR | Up to 28% | Up to 28% |
| Fees | $20 Maximum Application Fee | $20 Maximum Application Fee |
| Waiting Period | Must be a credit union member at least 1 month before applying | Immediate eligibility |
| Loan Limit | Maximum 3 in 6 month period | No limit in 6 month period |
Sources:https://www.nafcu.org/compliance-blog/comparing-pals-i-and-pals-ii-loans, https://ncua.gov/files/agenda-items/AG20190919Item4b.pdf
The current NCUA regulatory framework further protects borrowers from entering a predatory debt cycle by barring them from rolling over PALs. Federal credit unions are also forbidden from lending more than one PAL at a time to any borrower and lending more than three PALs to a single borrower within any six-month rolling period.
Payday alternative loans should not be used as a replacement for an emergency fund. This is a common mistake for consumers who live paycheck to paycheck. It is advisable to save money whenever you can, even if it’s only $5 or $10 per week, so you won’t need to borrow money. Consult with your credit union representative about different strategies to save effectively.
What are payday loans?
Payday loans appeared in the early 1990s when check-cashing merchants started offering them in unregulated states. These unlicensed “salary lenders” offered short-term loans with one-week terms and high annual percentage rates (APRs) that go to a 400% average APR. These high rates caught many Americans in “predatory lending cycles,” which were difficult to escape.
A payday loan repayment is due on your next payday, however, the high percentage of loan defaults has caused payday lenders to get more creative. Most payday loans can be stretched into longer terms if the borrower requests it but be cautious. The fees and additional interest can accumulate quickly. That’s one of the reasons why predatory lending laws exist.
Payday alternative loans vs payday loans
The maximum interest rate for a PAL is 28%. APRs on payday loans can be as high as 400%. There are also differences in the amounts you can borrow, the loan length, the qualification criteria, and the fees. Here’s a comparison chart for your review.
| Loan Details | Payday Loan | Payday Alternative Loan (PAL I or PAL II) |
| Lender | Payday Lender | Federal Credit Union |
| Loan Amount | Usually $500 or Less | $200 to $1,000 or up to $2000 |
| Length of Loan | 2 to 4 Weeks | 1 to 12 Months |
| APR | Up to 400% | No More Than 28% |
| Fees | Rollover Fee | $20 Maximum Application Fee |
The key elements to pay attention to in this comparison are the loan term, APR, and fees. Repaying a loan over one to twelve months is much easier than repaying it in full on your next payday. Repaying a payday loan over a longer term than 2 to 4 weeks will cost you rollover fees and exorbitant interest payments. That’s not the case with payday alternative loans.
How to qualify and apply for a payday alternative loan
To qualify for a PAL I, you must be a credit union member for one month before you can apply. The PAL II guidelines published in 2019 eliminated that requirement, but the credit union still has the right to approve or deny the loan. PALs were created with stricter guidelines to protect consumers.
Some credit unions have membership requirements, including living in a particular area, working for a certain company, or belonging to a specific organization. Others are open to everyone, but they may not offer PALs. Check for membership requirements on the websites of credit unions near you. If the information is not available, reach out for assistance. Keep in mind, phones still work!
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