Do You Need Good Credit for a Payday Alternative Loan (PAL)?

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Payday loans are a very expensive way to borrow money when you're facing a financial crisis. When you need cash urgently, payday alternative loans can be a more affordable solution—and good credit may not be necessary to get approved.

High fees associated with taking out a payday loan make them a high-cost option. Not only that, the Consumer Financial Protection Bureau (CFPB) reports that over 80% of payday loans are rolled over into another loan, which can lead to a debt cycle that leaves borrowers worse off than before you took out the loan.

Payday alternative loans could help you avoid this debt trap and better manage your finances. Read on to learn more.

What Is a Payday Alternative Loan?

Payday alternative loans (PALs) are offered by some federal credit unions as an option for borrowers who might otherwise end up turning to expensive payday loans in an emergency. Unlike payday loans that are due in full by your next payday, PALs are installment loans where you might make payments every month or every other week over a specific loan term.

The National Credit Union Administration (NCUA) sets rules for PAL terms. For this reason, PALs are more affordable than payday loans: Interest rates may only be as high as 28%, and application fees must be limited to what it costs the credit union to issue the loan, with a max of $20.

There are two types of payday alternatives loans—PAL I and PAL II. Below is a head-to-head comparison of how both work.

PAL I vs PAL II Loans
PAL IPAL II
Membership requirementMust be a credit union member for at least one month before applyingCan apply for a loan as soon as you become a member
Loan termOne to six monthsOne to 12 months
Loan amounts$200 to $1,000Up to $2,000

Payday Alternative Loan Credit Requirements

NCUA underwriting guidelines don't outline a minimum credit score needed to get approved for a PAL, and instead leaves it up to each credit union to determine approval criteria. Since PALs are designed as an alternative to payday loans that are geared to cash-strapped borrowers who might not have much of a credit history, their credit requirements are generally less stringent than other borrowing options.

In some cases, no credit check may be performed at all. Instead, credit unions want to see that your membership is in good standing and that you earn enough income to afford monthly payments. To verify your income, you may need to show pay stubs or bank statements. If you are interested in a payday alternative loan, you can search the MyCreditUnion.gov website for local credit unions and see what options might be available.

Loan Alternatives if You Have Good Credit

Other borrowing options may offer lower interest rates, higher loan amounts and longer loan terms than payday alternative loans for people with good credit. Here are some options:

Personal Loans

A personal loan could be a way to finance a larger unforeseen expense, such as an emergency medical procedure or car repair. Personal loans from banks, credit unions and online lenders may offer amounts of up to $100,000 and loan terms of nine to 60 months or more.

SoFi is an example of a lender that provides personal loans of $5,000 to $100,000 with competitive rates, extended loan terms and no application or origination fees.

0% Intro APR Credit Cards

Another way borrowers with good credit could bridge a financial gap is by opening up a credit card that offers 0% APR during an introductory period.

A credit card with a 0% intro APR won't accrue any interest for a period of months, and then the card's ongoing APR will kick in and apply to any remaining balance. Making equal payments each month to pay off a balance during a 0% APR period could be a money-saving way to pay for a major expense. Once the intro APR offer ends, the card could still provide great utility, especially if it provides rewards.

Home Equity Loans or Home Equity Lines of Credit (HELOCs)

If you own a home, you could consider borrowing from its equity. A home equity loan typically offers a fixed interest rate, fixed payment and fixed term. HELOCs offer a credit line that you can use and pay back as needed.

Interest rates can be low for loans and credit lines secured by your home—but it's important to ensure you can pay the loan back before tapping into your home equity. Otherwise, not repaying a home equity loan or HELOC could cause you to lose your house.

Options if You Have Bad Credit

Having bad credit doesn't mean you're limited to payday loans or payday alternative loans when you need to borrow cash. Avant is an example of a lender willing to work with borrowers who have less-than-perfect credit, and Upstart may use alternative data points, such as grade point averages, employment history and standardized test scores, to help approve borrowers.

You could also try a peer-to-peer lending platform, such as Prosper, where peer investors fund loans for borrowers. Another option could be joining a formalized lending circle where groups of people come together to save up and lend money to each other.

The best way to find options and compare borrowing costs is by shopping around. Using Experian CreditMatch™, you can get personalized offers that are suitable to your credit profile.

How to Improve Your Credit Before Borrowing

If you have the flexibility to work on your credit before applying for a loan, doing so could help you get approved for better offers. Taking the steps below could help build your score.

  • Make all debt payments on time. Payment history is the most important aspect of your credit score. Paying on time over time can help you improve your credit.
  • Reduce your card balances. Credit utilization—a ratio that expresses how much of your available credit lines you're using—is another key factor that affects your score. Adding even a small extra payment toward your cards each month could help you chip away at balances to help improve your credit.
  • Take care of past-due payments. Although late payments can stay on your record for up to seven years, paying off past-due balances could be better for your credit history than letting an unpaid balance linger.
  • Make sure no inaccuracies are hurting your score. Review your credit reports regularly to make sure there are no incorrect records negatively affecting you. If there's information on your credit report you believe to be incorrect, dispute it with the credit bureau reporting the information.

Lastly, consider signing up for credit monitoring to keep tabs on your score and progress. With Experian CreditWorks℠, you can track your score and even use score simulators to review how making different moves can help or hurt your credit.

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