What Is a Payday Alternative Loan?

If you're caught in the cycle of payday loans, relief often seems out of reach. But a lifeline does exist, and it takes the form of payday alternative loans (PALs). Designed to offer a more affordable route to quick cash, PALs are certainly worth considering as an overall better alternative to payday loans.

How Payday Alternative Loans Work

A payday alternative loan (PAL) is a modest, short-term loan that generally comes with more favorable fees and interest rates compared to traditional payday loans. 

These loans are offered by select federal credit unions, and can be utilized for a range of urgent expenses, such as emergency car repairs or overdue rent. 

PALSs are regulated and governed by the National Credit Union Administration (NCUA), and aim to offer members a more economical borrowing option, steering them away from the exorbitant costs associated with payday loans. They come in two different types:

PAL 1

PAL 1 loans can range from $200 to $1,000. They can be used for various urgent and unexpected needs like car repairs, medical emergencies, or other unplanned expenditures. 

The repayment terms fluctuate based on the credit union's policies, but most PAL 1 loans must be repaid within a one to six-month timeframe. 

With a capped annual percentage rate (APR) of 28% and a nominal application fee (no more than $20), PAL 1 serves as an excellent alternative to conventional payday loans.

One of the most significant constraints associated with PAL 1 loans is the frequency with which they can be acquired, as borrowers are limited to a maximum of three PAL 1 loans within a six-month timeframe. 

Additionally, eligibility criteria stipulate that applicants must have been active members of the issuing credit union for a minimum of one month prior to applying for a PAL 1 loan. 

These limitations were designed like this in order to promote responsible borrowing and ensure that the loan serves its intended purpose as a short-term financial solution.

PAL 2

PAL 2 loans share many similarities with PAL 1 but offer higher loan amounts. These loans can be used for more substantial financial purposes like home renovations or educational expenses. 

The maximum loan amount for PAL 2 is $2,000, and the repayment period extends from one to 12 months. 

Unlike PAL 1, there's no prerequisite membership duration for applicants, making it more universally accessible. We must also highlight the fact that you are not allowed to apply for both PAL types at the same time.

How are PALs Different From Payday Loans?

Even though payday alternative loans and payday loans both fall under the umbrella of short-term loans, there are some major differences between them.

Payday loans are offered by for-profit financial institutions with the aim of capitalizing on high fees and interest rates, often permitting multiple rollovers. In contrast, payday alternative loans are provided by federal credit unions, which operate as nonprofit organizations focused on member benefits.

Another distinguishing factor is the repayment duration. Payday loans usually require repayment within two to four weeks, whereas PALs offer more extended repayment terms, in some cases going up to a year. 

Moreover, payday loans can have extremely high APRs, sometimes reaching 400%, while PALs are capped at a much lower APR, generally 28% or less.

Furthermore, payday loans often have lower maximum amounts, usually up to $500. For those requiring immediate cash for emergencies, PALs offer a more substantial financial cushion, with loan amounts reaching up to $2,000.

How To Qualify for a PAL

The eligibility requirements for a PAL may vary, but generally, you must be a member of the federal credit union offering the loan. As we stated earlier, for PAL 1, credit unions usually require a minimum one-month membership, and the average membership fee is usually around $5.

If you have a less-than-stellar credit score but require urgent funding, PALs can be an invaluable option. Most credit unions approve applicants with low credit scores, although you'll need to provide details about your income, monthly expenditures, and employment status. 

Many credit unions now also allow for online applications, streamlining the overall process and making it easier for borrowers to find a lender.

Bottom Line

All in all, payday alternative loans represent a good choice for borrowers in need of a quick access to cash, especially when compared to traditional payday loans and the exorbinant fees that come with them. PALs, with their more flexible repayment terms and lower interest rates, are a recommended alternative, even though the qualification process is slightly more rigorous.