Divided National Credit Union Board Votes in Favor of New Payday Loan Alternative

Inside Subprime: October 21, 2019

By Jessica Easto

The National Credit Union Association (NCUA) voted last month in favor of a new rule that would allow federal credit unions to offer a short-term loan product designed to be an alternative to predatory payday loans.

The loan, called a Payday Alternative Loan or PAL II, is capped at $2,000 and must have repayment terms of one to 12 months. Application fees are maxed out at $20, and interest rates are capped at 28 percent, much lower than the average 400 percent interest rate of payday loans.

Borrowers can apply for a PAL II as soon as they become members of the credit union. They can only take one such loan out at a time, and they can only take out three PALs max per six months.

The vote was divided 2-1.

The chairman of the board, Rodney Hood, said that the PAL II was an alternative to payday lenders, saying that a small-dollar loan program “must strike the balance between flexibility and consumer protection.”

Payday loans, which are usually only for a few hundred dollars, typically have repayment terms of 14 days and high annual percentage rates (APRs). Because it can be difficult for borrowers to repay the loan so quickly, they are often given the option to “roll over” the debt, which racks up fees and interest and tends to lead to a cycle of debt.

NCUA officials say that the higher loan limit meets the demand for such loans and could also help borrowers consolidate what may have ended up being multiple payday loans into a single loan. According to the NCUA, when comments were filed on the loan program, some said the limit was too high and others said it was too low.

Learn more about payday loans, scams, and cash advances by checking out our city and state financial guides, including Chicago, Illinois, Florida, Texas, and more.