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Payday loans are extremely expensive. A payday loan is a short-term loan that's usually due on your next payday. Typical fees and interest rates on payday loans can run as high as 400%. With their high fees, and short payoff timelines, they are designed to trap you in debt. That's because many people end up forced to take a second payday loan to pay off their first one (and a third, and so on).
Despite the costs, it's understandable why you may feel you have no choice but to take a payday loan. After all, these loans provide fast access to money when you may have few other borrowing options.
If you find yourself in this situation, though, there's another option to think about before taking a payday loan. It's called a payday alternative loan (PAL), and credit unions provide them.
Payday alternative loans (PALs) are small-value loans offered by federal credit unions. PALs are allowed by the National Credit Union Administration as long as certain guidelines are met.
There’s no minimum credit score for these loans; each credit union will have its own criteria. Because they’re designed to be an alternative to payday loans, PALs typically won’t have strict credit requirements. But you’ll likely have to verify your income and show your ability to repay.
First and foremost, you must be a member of the credit union for at least a month prior to applying for a payday alternative loan. If you frequently rely on payday loans or think you may need one in the future, you may want to join a credit union in advance. Credit unions have varying membership rules and fees, but they often offer a slate of affordable banking products. So there could be other benefits to joining one as well.
For eligible credit union members, payday alternative loans come in amounts between $200 and $1,000 and have repayment terms between one month and six months. This is typically a longer repayment timeline than most payday loans. That means you'll be less likely to end up having to borrow again immediately to pay off your loan balance since you'll make smaller payments over time.
Where payday alternative loans really stand out is the cost. The application fee is capped at $20. And the maximum interest rate on these small-dollar loans is 28%. While this is higher than you'd pay with most standard personal loans, it's still well below the effective rate on payday loans, which could top 400%.
Borrowers can take out up to three PALs during any six-month period but can't roll one over into the other. If you are facing financial hardship and you need to borrow a small amount of money for a short time, this could be the perfect answer for you.
Get the best rates and terms to fit your needs. Here are a few loans we'd like to highlight, including our award winners.
In 2019, the National Credit Union Administration approved a new type of payday alternative loan, known as a PAL II. With these loans, you can borrow up to $2,000 and repay it over a term of up to 12 months. As with a traditional payday alternative loan, you’ll need to be a credit union member to get one, but you can apply for a PAL II as soon as you join.
Traditional payday alternative loan vs. PAL II
Traditional PAL | PAL II |
$200 to $1,000 loan amounts | Loan amounts up to $2,000 |
Loan terms of one to six months | Loan terms of one to 12 months |
Interest rate is capped at 28%; maximum application fee of $20 | Interest rate is capped at 28%; maximum application fee of $20 |
Must be a credit union member for at least one month to apply | Can apply immediately after joining a credit union |
Of course, just because these loans are cheaper than payday loans doesn't mean they are cheap. You should borrow only if you need to and borrow the minimum required to cover essential expenses.
Once you've paid off your loan, try to start saving an emergency fund so you won't have to take out a loan to cover unexpected expenses in the future. Ideally, your emergency fund will have enough money to cover three to six months of living expenses. But it's OK if it takes time to get to that level. Saving even a small emergency fund with a few hundred dollars could help you with surprise costs so you don't have to borrow with an emergency loan in the future.
Not all credit unions offer payday alternative loans. If PALs aren't an option, here are some other payday loan alternatives to consider:
Looking for a personal loan but don’t know where to start? Our favorites offer quick approval and rock-bottom interest rates. Check out our list to find the best loan for you.
A payday loan is a loan that's offered by a for-profit lender, while a payday alternative loan (PAL) is offered by credit unions, which are nonprofit member-owned organizations. Payday loans are typically due on your next payday, whereas a payday alternative loan will typically let you stretch your payments over several months. Payday loans have APRs as high as 300% to 400%, while the interest rate on a payday alternative loan is capped at 28%.
Qualifying for a payday loan is easier than getting a personal loan, as you'll typically only need proof of income and a bank account, whereas personal loans usually require a credit check. However, a payday loan is much riskier and more expensive than a personal loan.
Better alternatives to payday loans include small loans from banks, as well as personal loans from online lenders, which may be advertised as bad-credit loans. Other alternatives include looking for help from nonprofits, paying a bill with a credit card or taking out a cash advance, taking on extra work, or borrowing money from a family member or friend.
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We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent, a Motley Fool service, does not cover all offers on the market. The Ascent has a dedicated team of editors and analysts focused on personal finance, and they follow the same set of publishing standards and editorial integrity while maintaining professional separation from the analysts and editors on other Motley Fool brands.
*SoFi Personal Loan Disclaimer
Fixed rates from 8.99% APR to 29.99% APR reflect the 0.25% autopay interest rate discount and a 0.25% direct deposit interest rate discount. SoFi rate ranges are current as of 02/06/2024 and are subject to change without notice. The average of SoFi Personal Loans funded in 2022 was around $30K. Not all applicants qualify for the lowest rate. Lowest rates reserved for the most creditworthy borrowers. Your actual rate will be within the range of rates listed and will depend on the term you select, evaluation of your creditworthiness, income, and a variety of other factors.
Loan amounts range from $5,000–$100,000. The APR is the cost of credit as a yearly rate and reflects both your interest rate and an origination fee of 0%-7%, which will be deducted from any loan proceeds you receive.
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Citi Personal Loan disclaimer:
**Rates as of 05-31-2024. Your APR may be as low as 11.49% or as high as 20.49% for the term of your loan. The lowest rate quoted assumes excellent credit and a loan term of 24 or 36 months. Your APR will depend on a variety of factors including your creditworthiness, term of loan, and existing relationship with Citi. For example, if you borrow $10,000 for 36 months at 15.99% APR, to repay your loan you will have to make 36 monthly payments of approximately $351.52.
There is a 0.5% APR discount if you enroll in automatic payments at loan origination. Additionally, existing Citigold and Citi Priority customers will receive a 0.25% discount to the interest rate. If you are in default, your APR may increase by 2.00%. No down payment is required. Rates subject to change without notice.
You must be at least 18 years of age (21 years of age in Puerto Rico). Co-applicants are not permitted. Loan proceeds cannot be used for post-secondary educational or business purposes.
If you apply online, you must agree to receive the loan note and all other account disclosures provided at loan origination in an electronic format and provide your signature electronically.
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The full range of available rates varies by state. The average 3-year loan offered across all lenders using the Upstart platform will have an APR of 21.97% and 36 monthly payments of $35 per $1,000 borrowed. For example, the total cost of a $10,000 loan would be $12,646 including a $626 origination fee. APR is calculated based on 3-year rates offered in the last 1 month. There is no down payment and no prepayment penalty. Your APR will be determined based on your credit, income, and certain other information provided in your loan application.