By Ben Luthi
Edited by Samuel MountjoyWhat Is a Payday Alternative Loan (PAL)?
By Ben LuthiEdited by Samuel Mountjoy
Quick Answer
A payday alternative loan (PAL) is a short-term loan offered by federal credit unions with lower rates and fees than traditional payday loans.
A payday alternative loan (PAL) is a type of short-term loan offered by federal credit unions as an affordable alternative to payday loans. If your car breaks down or an unexpected bill hits before your next paycheck, a PAL can help you bridge the gap without falling into a costly payday loan debt cycle.
What Is a Payday Alternative Loan?
A payday alternative loan is a short-term loan issued by a federal credit union with rates and fees capped by the National Credit Union Administration (NCUA). The NCUA sets strict rules for PALs to protect borrowers from the high costs often associated with traditional payday loans.
There are two types of PALs, each with slightly different terms:
- PAL I: Loan amounts range from $200 to $1,000, with repayment terms of one to six months. You must have been a credit union member for at least one month before applying.
- PAL II: Loan amounts of up to $2,000 are available, with repayment terms of one to 12 months. There's no waiting period, which means you may be able to apply as soon as you become a member.
Both types carry a maximum interest rate of 28% and an application fee capped at $20. Federal credit unions are prohibited from rolling over PALs and can only offer one PAL to a member at a time.
Tip: Not every federal credit union offers PALs. Use the credit union locator at MyCreditUnion.gov to find one near you that does. Under "Additional Search Options," you can select PALs as a filter.
Payday Alternative Loans vs. Payday Loans
Payday loans are among the most expensive ways to borrow money. A typical two-week payday loan with a $15 fee per $100 borrowed translates to an equivalent annual percentage rate (APR) of nearly 400%.
If you can't repay on time, rollovers pile on additional fees, and that cycle of debt can be difficult to escape. PALs are designed to be a safer, more affordable option. Here's how the two compare:
| Payday Alternative Loans | Payday Loans | |
|---|---|---|
| Loan amount | $200-$1,000 (PAL I); up to $2,000 (PAL II) | Varies by state; typically up to $500 |
| Interest rates | Capped at 28% APR | Varies by state; can range from 36% to upwards of 600% |
| Fees | Application fee capped at $20 | $10-$30 per $100 borrowed |
| Repayment term | 1-6 months (PAL I); 1-12 months (PAL II) | Typically due by next paycheck (2-4 weeks) |
| Credit check | Typically required, but designed for low credit scores | Not required |
| Best for | Credit union members who need short-term cash at a lower cost | Borrowers who can't access other options and need funds immediately |
How to Qualify for a Payday Alternative Loan
To get a PAL, you must be a member of a federal credit union that offers them. Membership requirements vary, but you typically need to live, work or attend school in a certain area. Some credit unions serve specific groups, like teachers, military members or employees of a particular company. Others require only a small donation to a partner charitable organization.
Once you're a member, the application process is straightforward. Credit unions may ask for recent pay stubs to verify income, but there is no minimum credit score requirement.
Here are the steps for getting a payday alternative loan:
- Join a federal credit union that offers PALs.
- Meet the membership waiting period, if applicable.
- Provide proof of income, such as recent pay stubs.
- Apply for the loan amount you need.
Learn more: What Is a Credit Union?
Is a Payday Alternative Loan Right for You?
A PAL may be a good fit in a few specific situations:
- You need a small amount of cash for an emergency. If an unexpected expense—say, a car repair, a medical bill or a utility shutoff notice—is putting you in a bind, a PAL can give you access to funds quickly without the extreme costs of a payday loan.
- You want to avoid a debt spiral. Because PALs cap interest at 28% and prohibit rolling the debt over into a new loan, they're built to help you repay the debt and move on rather than trap you in a cycle of reborrowing.
- You need more time to repay. Payday loans are usually due within two to four weeks. The PAL II offers repayment terms of up to 12 months, which makes the monthly payment more manageable.
- You're trying to build your credit. Some credit unions report PAL payments to the credit bureaus, which means on-time payments could help your credit score. Payday lenders typically don't report positive payment history.
That said, PALs aren't available at every credit union, and you need to be a member to access one. If you're not already a member, you'll need to join.
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Other Options to Consider
If you can't access a PAL or you need more flexibility than one offers, here are some alternatives to consider:
- Apply for a personal loan. Personal loans may offer larger loan amounts and longer repayment terms than PALs. Even with less-than-perfect credit, you may qualify for a rate that's far lower than a payday loan.
- Request a payment plan or extension. Instead of borrowing, try negotiating directly with the company billing you. Many utilities, medical providers and landlords have hardship programs available.
- Rework your budget. If possible, cut spending in another area to cover the expense. Even small adjustments, like bringing lunch to work or pausing a subscription, can free up cash quickly.
- Bring in more income. Consider asking for extra hours at work or picking up a short-term side gig. Selling unused items is another fast way to make extra money.
- Look for financial assistance. Government and local programs may be able to help. The 211 Network can connect you with resources in your area.
- Use an early payday app. Some early payday apps let you access a portion of your earned wages before payday, sometimes at no cost. Check whether your employer already partners with one.
Learn more: How to Find Credit Counseling and Financial Assistance Programs
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 a personal loan instead. Experian's loan comparison platform can help you review personalized offers based on your credit profile.
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About the author
Ben Luthi
Ben Luthi has worked in financial planning, banking and auto finance, and writes about all aspects of money. His work has appeared in Time, Success, USA Today, Credit Karma, NerdWallet, Wirecutter and more.
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