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What Is a Payday Alternative Loan?

These credit union loans are better alternatives to payday loans.

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By Mary Beth Eastman

Written by

Mary Beth Eastman

Writer

Mary Beth Eastman is a Credible authority on personal finance. Her work has been featured by The Balance, Money Under 30, and more.

Edited by Jared Hughes

Written by

Jared Hughes

Editor

Jared Hughes is a personal loan editor for Credible and Fox Money, and has been producing digital content for more than six years.

Updated April 11, 2024

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Typical payday loans can trap you in a sort of debt quicksand, racking up fees and charges while you struggle to find a way to escape. But there’s another kind of small-dollar, short-term loan, called a payday alternative loan (PAL), that can provide you with fast funds at a modest interest rate.

PALs have a number of consumer protections baked in, potentially providing you with a lower-cost loan alternative that still delivers the money you need when you need it.

What is a payday alternative loan?

A PAL is a small-dollar personal loan with a relatively short repayment period that a borrower can use instead of turning to a typical payday loan. But you can only get a payday alternative loan from a federal credit union. Fortunately, some credit unions let you apply for a PAL as soon as you become a member. These are great alternatives to payday loans, especially if you need an emergency loan.

There are two types of payday alternative loans: PALs I and PALs II. The federal National Credit Union Administration (NCUA) board creates the rules that govern each loan type. Both PALs I and II are closed-end loans, meaning you receive the full amount upfront and get a set period of time to pay it back. They both cap interest rates at 28% (which is significantly lower than rates on payday loans), and are both fully amortized, which means your payments are made in equal installments over the life of the loan.

  • PALs I offer loan amounts between $200 and $1,000, with a minimum loan term of 1 month and a maximum of 6 months. You’ll need to be a member of the credit union for at least 1 month to use a PAL I.
  • PALs II have no minimum loan amount and a maximum of $2,000. The minimum term is one month, but the maximum is 12. You can get a PAL II immediately after becoming a member of the credit union.
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Good to know

The application fee for a PAL can’t be more than $20.

How do payday alternative loans work?

To get a payday alternative loan, you need to be a member of a federal credit union that offers them. You also don’t need to have good credit to qualify for a PAL, making them a great option for those with bad credit.

If the credit union approves your loan application, you’ll receive your funds. After that, you have a set amount of time to repay the loan, plus interest. The exact amount of the loan, the APR, and the repayment period will be spelled out in your loan agreement.

Learn More: How Do Payday Loans Work?

Payday alternative loans vs. payday loans

Payday loans come with astronomically high fees that can equate to an annual percentage rate (APR) of 400% or more, depending on where you live. With a short two to four weeks before the loan is due, many people struggle to repay the entire balance plus fees, sinking into a debt trap where they roll the loan over and over again, paying more and more in fees or interest.

Payday alternative loans have capped interest rates, offer longer terms, split repayment into several installments, and do not allow loan rollovers.

Learn More: Payday Loans vs. Personal Loans

PALs