What Is a Payday Alternative Loan?

Written By
I. Mitic
September 28,2023

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 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 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.


Payday Loans

Payday Alternative Loans (PALs)

Lender Type

For-profit institutions

Federal Credit Unions


State laws (varies by state)

National Credit Union Administration (NCUA)

Loan Amount

Up to $500 typically

PAL 1: $200-$1,000; PAL 2: Up to $2,000

Interest Rate

Can reach up to 400% APR

Capped at 28% APR

Repayment Term

2 to 4 weeks

PAL 1: 1-6 months; PAL 2: 1-12 months


$10 to $30 per $100 borrowed

Application fee of $20 or less

Membership Requirement


At least one month for PAL 1

Loan Frequency Limit

Varies by state

Max 3 PAL 1 loans in 6 months

Credit Score Impact

Often does not build credit

May help build credit

Rollovers Allowed

Yes, often multiple times



Widely available but not in all states

Available in all 50 states but must be a credit union member

Usage Restrictions


Generally for emergency expenses

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.


Is a personal loan a superior alternative to a payday loan?


Personal loans almost invariably offer lower interest rates than PALs, as they are not categorized as high-risk loans. Additionally, personal loans afford longer repayment periods, providing you with more time to stabilize your financial situation.

How can I eliminate the need for payday loans?


To eliminate the need for payday loans or PALs, it's advisable to establish a budget and adhere to it rigorously. Building an emergency fund can also serve as a financial buffer, reducing the necessity for high-interest loans during unforeseen circumstances.

What is a payday alternative loan?


A payday alternative loan is a specialized loan product offered by certain credit unions as a more cost-effective and flexible substitute for traditional payday loans. 

These loans are regulated by the NCUA and are designed to benefit credit union members. 

To qualify, you generally need to be a member of the credit union, and for PAL 1, a one-month membership is usually a prerequisite.

About author

For years, the clients I worked for were banks. That gave me an insider’s view of how banks and other institutions create financial products and services. Then I entered the world of journalism. Fortunly is the result of our fantastic team’s hard work. I use the knowledge I acquired as a bank copywriter to create valuable content that will help you make the best possible financial decisions.

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