What’s a Payday Alternative Loan (PAL), and How Can You Get One?

The only downside to Payday Alternative Loans (PALs) is that you have to join a credit union now in order to apply for one when you really need it.

Frequent readers of the OppLoans Financial Sense Blog (or “Sensies” as we insist on calling them despite the fact that everyone tells us this is a terrible name) know how we feel about payday loans. To put it succinctly, we’re not fans.

As such, we’ve spent a lot of time writing about ways that people can avoid payday loans and other types of high-cost, short-term no credit check loans, like title loans and cash advances. The best way to avoid them, for the record, is to start saving money and build up an emergency fund.

But that’s a long-term fix to what is often a very immediate problem. When you have a financial emergency, like a surprise medical expense or an unexpected car repair, you need a solution that’s going to help you right now.

This is where Payday Alternative Loans, or PALs, come in. They do require a little bit of foresight in order to access, but they are one of the best financial products out there for people who are looking to steer clear of predatory payday loans.

What is a Payday Alternative Loan (PAL)?

So, there’s a difference between any old alternative to a payday loan and a Payday Alternative Loan (PAL). Notice how the latter is capitalized and comes with its own acronym in a very fancy set of parentheses? That’s because PALs are a specific type of loan product.

PALs are loans offered by credit unions that belong to the National Credit Union Administration (NCUA). Credit unions, by the way, are non-profit alternatives to traditional for-profit banks. Generally, membership in a credit union is determined by factors like where you live, work, or worship.

Because credit unions are nonprofit institutions designed to serve the interests of their members, they are able to offer products at a lower rate than for-profit institutions that are concerned with maximizing profit.

As such, credit unions that belong to NCUA have the option of offering PALs that come with much, much lower interest rates than other bad credit loans. Like payday loans, they also come with shorter terms than a traditional personal loan.

What are the terms for a PAL?

Under the policies set by the NCUA, all PALs must meet the following criteria:

Loan amounts between $200 to $1,000.
The borrower must be a member of the federal credit union for at least 1 month.
The term of the loan must range from 1 to 6 months.
The federal credit union can charge an application fee only in the amount needed to recoup the actual costs associated with processing the borrowers application, up to $20.
The PAL cannot be rolled over.

The maximum interest rate for a PAL is 28 percent, which is almost one-fourteenth the cost of an average payday loan. Additionally, the NCUA has proposed some rule changes that would allow credit unions to, among other things, ditch the one-month membership requirement.

How are PALs better than payday loans?

PALs are better than payday loans in pretty much every way! As we mentioned in the paragraph above, the maximum interest rate for a PAL is 28 percent. Compare that to the average APR for a payday loan, which comes in at 391 percent!

Additionally, credit unions are barred from rolling over PALs, which means that borrowers are less likely to be caught in a predatory debt cycle. Rolling over and reborrowing short-term loans is why the average payday loan customer ends up spending almost 200 days a year in debt.

The current NCUA regulatory framework goes even further to protect borrowers from entering a debt cycle with PALs. Credit unions are not only forbidden from loaning more than one PAL at a time to any single borrower, but they are also barred from lending out more than three PALs to a single borrower within any six-month rolling period.

How can you get a PAL?

The biggest disadvantage to PALs is their accessibility. You have to be a member of a given credit union in order to apply for one. So if there isn’t a credit union that you can join that also offers PALs, you’re out of luck. Getting a payday loan, on the other hand, is easy. Much too easy!

The one-month membership requirement also means that you cannot, for instance, go out and join a credit union right now if you need a PAL to pay for a car repair. Instead, you should go out and join a credit union before you have an emergency expense. That way, you’ll be ready to borrow a PAL when you need it.

If you’re already a member of a credit union that offers PALs, just call or visit your local branch to apply. And while you’re at it, see if they offer any free financial counseling services to their members. Many do!

There’s another payday loan alternative out there.

If you need a bad credit loan and you can’t access a PAL, then you’re pretty much stuck with a payday or title loan, right? Nope! We hate to get all “Yoda’s Ghost” on you but … there is another.

Bad credit installment loans can make for a safer, more affordable alternative to payday loans. The right installment loan will come with a lower interest rate plus more affordable individual payments.

Some lenders, like OppLoans, even report your payment information to the credit bureaus, meaning that on-time payments could help improve your credit score, which can mean better options for emergency bridge financing in the future!

Still, the best way to steer clear of payday loans isn’t to take out a PAL or a bad credit installment loan. It’s to build up your savings so that you don’t need any loan in the first place! To learn more about how you can improve your long-term financial outlook, check out these related posts and articles from OppLoans:

Do you have a financial question you’d like us to answer? Let us know! You can find us on Facebook and Twitter.

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The information contained herein is provided for free and is to be used for educational and informational purposes only. We are not a credit repair organization as defined under federal or state law and we do not provide "credit repair" services or advice or assistance regarding "rebuilding" or "improving" your credit. Articles provided in connection with this blog are general in nature, provided for informational purposes only and are not a substitute for individualized professional advice. We make no representation that we will improve or attempt to improve your credit record, history, or rating through the use of the resources provided through the OppLoans blog.