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How payday alternative loans work
With APRs capped at 28%, these low-cost loans can lift you out of a cycle of debt.
Payday alternative loans are offered by select federal credit unions to help members borrow small amounts of money without the high fees of a traditional payday loan. But you’ll have to wait at least a month to borrow if you’re not already a member. This means it’s likely not ideal for emergencies — especially if you lost your job.
What is a payday alternative loan?
A payday alternative loan (PAL) is an inexpensive short-term loan. Like its name implies, it acts as an alternative to high-cost payday loans and is regulated by the National Credit Union Administration (NCUA).
Depending on the credit union you borrow from, a PAL can be like your typical payday loan that requires a one-time repayment. Or it can be more like an installment loan, which allows you to repay over multiple months.
The NCUA sets limits on how much you can borrow, how long you have to pay it off and fees associated with your loan.
Loan amount: $200 to $1,000
Loan term: One to six months
APR: Up to 28%
Fees: Up to $20 and no more than the cost of processing the loan
Rollovers: You can’t roll over your PAL or take out a new one until you’ve paid off your first loan
Borrowing limits: You can take out up to three PALs over six months
Do I qualify for a PAL?
You must be a member of a federal credit union for at least one month to be eligible for a PAL. You generally don’t need to have good credit to qualify, but you’ll often need to prove that you have a regular source of income and that you’re able to repay the loan on time. Many credit unions also require you to be employed.
Membership eligibility differs by credit union but usually depends on where you live, where you work, your type of job or whether you’re related to a member. Some also allow you to join if you donate to a charitable organization.
The membership process typically involves filling out a quick application and opening a checking or savings account.
Emergency loans for coronavirus assistance
Many credit unions have started offering emergency loans to help individuals cope with the financial impact of the coronavirus outbreak. These come with 0% rates, flexible terms and the possibility of deferred repayments. You can generally apply online or over the phone.
An emergency personal loan may be a better option than a PAL in this situation, especially if you need immediate financing. You might not qualify for a PAL if you’ve been laid off or aren’t currently a member of a credit union offering PALs. And that 28% interest rate, while lower than a payday loan, still might not be affordable.
PALs are only available at federal credit unions, but not every federal credit union offers PALs. Each credit union imposes its own PAL loan limits and costs, often limiting these loans to specific groups.
These are some of the main options you have, but there are also some smaller credit unions that offer similar loans — even if they’re not technically PALs.
UVA Community Credit Union is open to anyone who works, lives or goes to school in or around Charlottesville, Virginia. You can also become a member if your spouse, children, siblings, grandparents or grandchildren are members.
Its PALs are smaller but less expensive than the legal limit. But to qualify, you’ll need to join the credit union at least six months prior to applying.
To help you save, 5% of the money you put toward the loan is deposited into the savings account you open when you join.
Loan amount: Up to $500
Loan term: Up to 30 days
APR: 18%
Fees: None
Eligibility: Open to members of at least six months who sign up for direct deposit
Open to residents of Broome, Chenango and Tioga counties in New York and their family members, GHS offers a wider range of payday and installment alternative loans. They come with an application fee and interest that are right on par with the legal limits. However, you won’t be able to borrow more than 20% of your net worth, and you have to provide at least two recent pay stubs to be approved.
Loan amount: $200 to $1,000
Loan term: One to six months
APR: 28%
Fees: $20 application fee
Eligibility: Open to members of at least 30 days who prove their ability to repay
TFCU is based in Southern California and open to employees of a wide range of companies and unions in the area as well as their family members. TFCU offers a limited range of loan amounts with interest and an application fee. Prepare to present two recent pay stubs when you apply.
You can knock 10% off your interest rate with direct deposit and autopay.
Loan amount: $250 to $500
Loan term: One to six months
APR: 28%
Fees: $20 application fee
Eligibility: Open to members of at least 30 days
Can I get a PAL online?
It depends on the credit union. Some offer online PAL applications, where the credit union transfers the funds directly into your credit union account as soon as you sign the loan documents. But others might require you to visit a branch location.
Benefits of a PAL over a payday loan
Relatively low interest. The maximum APR an FCU can charge on a PAL is 28% — well below the typical triple-digit APR you get with other short-term loans.
Limited fees. FCUs can’t charge more $20 or the cost of processing your application and disbursing your funds.
No credit score requirements. You typically don’t need to have good credit — or a credit score at all — to qualify for a PAL.
Clear rates and terms. Because PALs are heavily regulated, what you see is what you get. You won’t have to worry about any hidden fees or unexpected costs when you borrow.
Avoid the cycle of debt. You aren’t allowed to renew your PAL or take out another one until you’ve paid off the first, helping you to avoid getting caught in spiraling debt that can come with traditional short-term loans.
Where PALs fall short
Hard to find. Not all FCUs offer PALs, and you might not be eligible to join the few that do.
Not best for emergencies. Most credit unions require at least a month of membership before you’re eligible for a PAL.
You typically need a job. Many FCUs require borrowers to submit at least two recent pay stubs or an equivalent to prove you have enough an income to support paying off your PAL.
How are payday alternative loans safer than short-term loans?
Because of their limited cost, payday alternative loans are much safer than other short-term loans. Rather than paying a fee of $10 to $15 per $100 borrowed — which can be the APR equivalent of 300% or more — you’ll only have to pay an APR of 28% at most. This keeps costs low so you can get the money you need without having the best credit.
Other payday loan alternatives
While only federal credit unions officially offer PALs, many local credit unions and small banks offer similar payday loan alternatives as perks of membership. Yours might offer a small-dollar savings loan that delivers half of your funds up front and deposits the other half into a savings account, which you can access after you’ve paid off your loan in full.
Another option might be to look into lending circles offered by online companies. These work by giving you and a group of members — usually five to 10 people — access to a pot of funds that you all contribute to each month. Each member of the circle take turns borrowing from it until you’ve all taken out a loan.
Depending on where you live, your local government and charities might offer resources for free financial services or help with food and utilities to ease your costs of daily living. If you find yourself relying on payday loans, you might also want to consider signing up for credit counseling.
In addition to these, there are other payday loan alternatives that might help when you hit a bump in your financial planning. But keep in mind that some lenders use PAL language but still offer high-cost loans. Read the fine print of any loan you get to make sure it isn’t charging you more than the legal limit of your state.
Keep an eye out for PALs II
In May 2018, the NCUA proposed to expand the PALs program to include another payday loan alternative it calls PALs II. These loans would expand maximum loan amounts to $2,000 with maximum repayment terms of 12 months and no limit to how many loans you can take out over a specified time.
Importantly, they wouldn’t require a minimum membership period — meaning you could join the credit union with immediate loan eligibility.
The NCUA is considering another third alternative with a yet more flexible fee structure and features. We’ll update this page as we learn more.
Consider an installment loan as another payday loan alternative
If you’ve decided to get a short-term loan, consider these installment loan providers that offer loans with longer repayment terms than a typical payday loan.
We update our data regularly, but information can change between updates. Confirm details with the provider you're interested in before making a decision.
Payday alternative loans are a useful low-cost alternative for those who are looking into a payday or other short-term loan. But one-month membership requirements and limited availability might not make it an option for you.
If you can’t afford the waiting period or don’t qualify for credit union membership, read our guide to short-term loans learn more about what to expect when you borrow.
Frequently asked questions
Generally, no. Most credit unions require you to be a US citizen or permanent resident to join. Many also ask for a Social Security number.
Some do. A local bank might offer a payday loan alternative, especially if it’s a community development financial institution (CDFI). But you likely won’t find a payday loan or an alternative at a national or international bank.
Yes. Many payday lenders will take you on as a borrower even with poor credit. But there’s a catch: You’ll pay high rates, and your payment is often due within just a few weeks.
To stay out of a cycle of debt, look into payday loan alternatives that accept borrowers with bad credit scores.
Anna Serio is a trusted lending expert and certified Commercial Loan Officer who's published more than 950 articles on Finder to help Americans strengthen their financial literacy. A former editor of a newspaper in Beirut, Anna writes about personal, student, business and car loans. Today, digital publications like Business Insider, CNBC and the Simple Dollar feature her professional commentary, and she earned an Expert Contributor in Finance badge from review site Best Company in 2020.
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