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What is a payday alternative loan?

What Is a Payday Alternative Loan and How Do I Apply?

Updated on February 8, 2023


Knowing your options is essential if you need to borrow money and are considering a payday loan. You can receive quick cash via payday loans, but they have substantially higher interest rates than other types of loans. Payday alternative loans from credit unions may be cheaper than payday loans if you want to borrow a small amount of money affordably.

Payday alternative loans, or PALs, can be an excellent option for those who want to avoid payday loans. However, like any other loan, you must understand the basics of how they work and the requirements to get one before applying. Read on to gain essential knowledge about payday alternative loans here and ensure they're suitable for your financial needs.

What is a Payday Alternative Loan?

Some federal credit unions offer payday alternative loans, which enable their members to borrow a small loan at a more affordable cost than predatory payday loans. The National Credit Union Administration (NCUA) regulates payday alternative loans, which established the PALs program in 2010 to provide borrowers with an alternative to expensive payday loans.

Payday alternative loans are available in two types- a traditional PAL or PAL I and a PAL II, which the National Credit Union Administration (NCUA) approved in late 2019. A credit union may provide its members with either kind of loan, but each member can only receive offers for one loan at a time.

The terms for two categories of payday alternative loans defined by the NCUA are given below:


Eligibility requirement- The borrower must have been a credit union member for at least one month.

Loan amount- One can borrow between $200 to $1,000.

Loan term- Repayment can be in installments over one to six months. However, no rollovers are permitted.

Cost of the Loan- Credit unions can charge a maximum annual percentage rate of 28% and an application fee of not more than $20. 


Eligibility requirement- Though the applicants must be credit union members, they can apply as soon as they join.

Loan amount- One can borrow any amount up to $2,000.

Loan term- Repayment terms can range from one to twelve months with no rollover allowed.

Cost of the Loan- Like PAL I, the annual percentage rate is at most 28%, and an application fee can be at most $20.

Are Payday Alternative Loans Safe?

Since credit unions that constantly try to help their members become more financially stable offer PALs, these loans can be considered a safe borrowing option. Payday Alternative Loans stand by their name by assisting borrowers in getting funds at low-interest rates and making on-time payments.

A traditional high-cost and short-term Payday loan could often have fees of $10 to $30 for each $100 borrowed, with repayment expected in two weeks. The annual percentage rate (APR) comes to around $400 if a lender charges $15 for a two-week loan of $100. On the contrary, the APR of payday alternative loans doesn't exceed 28%.

Additionally, on the one hand, where credit unions encourage disclosing repayments to the major credit bureaus, payday lenders typically do not report payments unless you default. A history of on-time payments on your PAL can help you improve your credit score.

Payday Alternative Loans Vs. Payday Loans

Since payday alternative loans were created to be a superior alternative to payday loans, there will be some significant differences between the two. Here are a few differences you can keep in mind when choosing between payday loans and payday alternative loans:


Payday alternative loans (PALs)

Payday loans

Loan providersThese loans are offered only by certain federal credit unions to their members.You can get a Payday loan from multiple financial institutions like traditional and online direct lenders.
Loan requirements To apply for a traditional PAL, you'll need to be a credit union member for at least a month. You can use a PAL II as soon as you become a credit union member.You can qualify for a payday loan comparatively easily. Lenders typically require you to have an active bank account, proof of income, and a document to prove your age.
Loan cost The maximum interest rate for a payday alternative loan is 28%, and the highest application fee a PAL lender can charge can't be more than $20.Payday loan lenders usually charge very high-interest rates, usually in three digits.
Loan amountsYou can borrow up to $2,000 with a payday alternative loan.Payday loans are usually small loans of $500 or less.
Loan repaymentsYou can expect a more extended repayment timeline with payday alternative loans ranging from one to 12 months.Payday loans are typically supposed to be repaid by your next pay day or within two to four weeks.
RolloversYou’re less likely to find yourself stuck in a debt cycle with PALs since there’s a limit on how many of these loans you can borrow at one time.Traditional payday loans allow multiple rollovers, exponentially increasing the total cost of the loan due to rollover fees.
Where can I get a payday alternative loan?

Where Can I Get a Payday Alternative Loan?

Since not all credit unions provide PALs, calling your local credit union to inquire about their availability is one of the best methods to obtain these loans. A credit union may also help refinance an existing payday loan for a member into a PAL I loan.

To get started, you can use the NCUA Credit Union locator. You can also ask about eligibility requirements if you aren't a member because every credit union can have different membership requirements. If you're already a credit union member, check if they offer PALs or any free financial counseling services, as many do!

What are the Requirements for PAL?

Different credit unions can have varying requirements for membership as well as PALs. For membership, most credit unions require you to meet the following criteria:

  • Reside in a specific area
  • Work for selected employers
  • Belong to a particular group or association (like a school or a labor union)
  • Have a family member or relative who is already a credit union member

Next, you may need to make an initial deposit to open your account, and there is often a one-time membership charge that can be as low as $5.

To apply for a PAL, not all credit unions require their customers to have a perfect credit score. They instead consider factors like income and repayment capacity of the borrowers. For this reason, you may be asked to provide proof of income when you submit your application.

How to Apply for a Payday Alternative Loan?

Step 1: Join a credit union that offers PALs.

Step 2: Check the eligibility criteria for payday alternative loans and work towards it.

Step 3: You can call or visit your local branch to apply. Some credit unions even accept online loan applications from members.

Step 4: Depending on your credit union, you can expect them to inquire about your financial situation or run a credit check during the application process.

Step 5: Once approved, you'll receive the funds.

Step 6: You can repay your PAL in installments based on your repayment plan.

What are the alternatives to payday loans?

What Are the Alternatives to Payday Loans?

Suppose you need to decide whether an alternative payday loan would suit your financial situation. In that case, you have alternatives for payday alternative loans as well. Here are some of the options for you to consider over a payday loan:

Personal Loans

Most credit unions offer personal loans with much lower interest rates and fees than payday loans. You can borrow funds using a personal loan for various purposes and repay them in consistent monthly payments.

Borrow Money From Friends Or Family

A loan from relatives and friends could be an excellent method to avoid a high-interest-rate payday loan. You could even be able to get a loan with absolutely no interest.

Make A Monthly Payment Plan

In this type of cash advance loan, you agree to make lower monthly payments over a predetermined length of time. Even though you might pay more interest by choosing this payment plan, it might help you get out of your current financial bind without incurring new debt.

Line Of Credit

A personal line of credit approves a specific amount called your credit limit. You only borrow what you require from the predetermined limit, and you only pay interest on the amount you borrow.

Low-Interest Credit Card

You can obtain a low-interest credit card or at least one with an annual percentage rate significantly lower than the APR for a payday loan. You'll typically need good or even better credit to be eligible for a credit card with a low-interest rate.

Bad Credit Loans

Several lenders offer online loans for bad credit to all consumers, regardless of credit history and score. When approving your loan application, bad credit loan lenders usually consider factors like income, employment situation, and debt-to-income ratio.


When you have a financial emergency, such as an unexpected medical bill or a sudden auto repair, you need a solution that will assist you immediately. Suppose you find Payday alternative loans as an affordable credit option. In that case, it's better to join a credit union before facing such urgent financial situations due to their one-month membership requirement. You can check out the websites of individual credit unions to learn about their criteria for payday alternative loans in detail. Although payday Alternative Loans require a bit of foresight to access them, they're an option for people who want to avoid payday loans.