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

By
Alex Huntsberger
Alex Huntsberger has covered loans, credit scores, and personal finance for OppLoans since 2015. He is a graduate of Oberlin College and a regular contributor to the Chicago Sun-Times.
Updated on May 3, 2021
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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.

The best way to avoid loans, 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 an option for people who are looking to steer clear of 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. (To learn more about bad credit loans, be sure to check out the OppU Guide to Bad Credit Loans here.)

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%, 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.

The maximum interest rate for a PAL is 28%. Compare that to the average APR for a payday loan, which comes in at 391%!

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?

With PALs, 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.

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.

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!

Still, it’s best to build up your savings so that you don’t need any loan in the first place!

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