What Is a Payday Alternative Loan?

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If your car breaks down or you get hit with an unexpectedly high utility bill, a payday loan isn't the only way to bridge the financial gap until your next paycheck. A payday alternative loan (PAL) is a cheaper way to borrow that can keep you from falling into the payday loan debt trap. Read on to learn what PALs are and how they compare to payday loans.

What Is a Payday Alternative Loan?

A payday alternative loan is a type of short-term loan offered by federal credit unions as an affordable alternative to expensive payday loans if you need money to make ends meet on short notice.

The National Credit Union Administration (NCUA) sets guidelines for the costs and terms of PALs. For example, the interest rate is currently capped at 28%. Credit unions are allowed to charge an application fee, but it must be a reasonable amount that only covers the actual cost of loan processing.

There are two types of PALs available with slightly different terms and requirements. Here's what you need to know about each:

  • PAL I: Loan amounts are limited to $200 to $1,000, and repayment terms can range from one to six months. Borrowers need to have been credit union members for at least a month prior to loan application to qualify.
  • PAL II: Loan amounts up to $2,000 are available, and loan terms can range from one month to 12 months. The one-month membership requirement doesn't apply here—you may be able to qualify for a PAL II as soon as you become a credit union member.

How Does a Payday Alternative Loan Compare to a Payday Loan?

Payday loans are one of the most expensive ways to borrow money. Payday lending partners typically charge a flat fee for every $100 you borrow—$15, for example, on a loan with a two-week term. This might seem small at first, but it's equivalent to nearly a 400% annual percentage rate (APR).

Aside from being expensive, payday loans can also be inconvenient. You'll need to pay back your payday loan by your next paycheck, which can be a challenge if you have other bills to manage. If you can't pay the loan back, you may be able to extend it, but you'll likely be charged another fee to do so. Accumulating fees can lead to a debt cycle that's hard to recover from.

In comparison, payday alternative loans have a lower interest rate and may offer a longer repayment term, making debt payments more manageable.

How to Qualify for a Payday Alternative Loan

To qualify for a payday alternative loan, you'll need to be a member of a credit union that offers them. Membership conditions vary, but generally, you need to live, work or attend school in a certain place to become a member of a credit union. For example, you may be able to join a teachers credit union, or one that serves military personnel. Some credit unions simply require a donation to a charitable organization to qualify. You can search for credit unions near you on MyCreditUnion.gov to see what loans may be available.

As far as PAL application requirements, credit unions may ask for pay stubs as part of the application. Having enough recurring income to repay the debt is one of the key factors the lending partner will use to determine if you qualify and how much you can borrow. There isn't a minimum credit score required for payday alternative loans.

Other Options to Consider

Even if you meticulously budget your money, surprise expenses can throw you off track. Perhaps you have to buy a plane ticket to see a sick relative, or you chip a tooth and need dental work—emergencies can be expensive. Below are some other ways to make ends meet:

  • Request a payment plan or extension. Instead of borrowing to pay a bill, you could try to negotiate a payment arrangement or plan with the company billing you.
  • Rework your budget. If possible, try to cut spending in another area to compensate for the new bills. For example, maybe you could take your lunch to work or carpool for a few weeks to save on gas and food.
  • Bring in more income. Try requesting more hours at work or picking up a side hustle. Putting items up for sale that you don't need could be another way to raise money.
  • Look for financial assistance. In some cases, you might qualify for assistance through government and local programs. The 211 Network can help you locate and find assistance options.
  • Consider an early payday app. Some early payday apps, like Earnin, let you cash out a portion of your paycheck before payday without a fee. See if your employer already partners with a company that provides this service. If not, find an option that works for you.
  • Shop around for personal loans: Personal loans may offer larger loan amounts than payday alternative loans, and stellar credit may not be necessary to qualify.

Explore Your Options, Even in an Emergency

Getting a surprise bill is never fun, and it's natural to want to resolve the issue right away. While a payday loan can get you money fast to cover the bill, it could cost you more in the long run. Exploring other options first could help you come up with a more affordable solution.

If you're not a member of a credit union that offers payday alternative loans (or you need to borrow more money), you could consider personal loans instead. The Experian CreditMatch™ marketplace can help you shop around and compare personalized offers.