3 Ways a Payday Alternative Loan Can Get You Out of a Bind

Avoiding a payday loan saves you money.

Credit union members have access to a financial product called a payday alternative loan (PAL). A PAL is a great tool to have available when financial trouble rolls around. Here, we cover what a PAL is, how it works, and how it can help you avoid predatory lenders.

What is a payday alternative loan?

A PAL is a type of short-term loan offered by federal credit unions, with guidelines set by the National Credit Union Administration (NCUA). There are two types of PALs -- traditional and PAL II. 

Here is a quick primer on the rules set forth by NCUA for these two types of loans. 

Rules for traditional PAL

• The maximum interest rate can't exceed 28%. 
• Credit unions can charge no more than $20 for the application fee. 
• Repayment terms can range from one to six months.
• Loan amounts must be within $200-$1,000.
• A borrower must be a member of the credit union for at least one month.

Rules for a PAL II

• The maximum interest rate is 28%.
• Credit unions can charge no more than $20 for the application fee.
• Repayment terms are between one and 12 months.
• Loan amounts can be up to $2,000.
• A borrower must be a member of the credit union but can apply as soon as they join.

It’s up to a credit union which type of loan it offers. However, members can only get one type of loan at a time. Here are three ways a PAL could benefit you.

1. There's no need for a payday loan

Payday loans are notoriously expensive and, for some, financially dangerous. Not only do these loans frequently carry an interest rate north of 400%, but they’re also tough to get out of. If you can’t pay the loan off by the time it’s due, you may be forced to take out another loan to pay off the first, catching you in a high-interest trap. 

2. You'll have faster, easier access to money

When your name is on a bank account, you're a customer. When you hold an account with a credit union, you're an owner-member. And because each member has one vote in electing board members, you're no more (or less) important than other members. 

This means it may be easier to qualify for a PAL than it would be to qualify for a personal loan with a traditional bank -- simply due to your status as an owner-member and the fact that credit unions have more flexibility when it comes to loan approval.

3. You're not stuck in a debt trap

Depending on whether your credit union offers a traditional PAL or a PAL II, your loan term will be between one and 12 months. You won't get stuck owing the total two weeks later, and you'll be less likely to need to take out another loan to pay off the first. 

What to do to qualify for a PAL

If you’re already a credit union member, qualifying for a PAL is as easy as filling out an application. If you’re not yet a member, you’ll need to take care of joining first.

Finding a credit union 

Joining a credit union is easier than it may seem. Typically, credit unions want members to meet specific conditions. For example, a credit union could be designed for teachers or pipefitters. On the other hand, a credit union may accept members who live within a particular county. Some credit unions even allow you to join if you donate to a charitable organization. 

You can find the right credit union for you by taking the following steps:

1. Use the credit union locator tool at MyCreditUnion.gov. If you type in your zip code, a list will appear with the nearest credit unions to your home.
2. Each credit union on the list includes a link to its website. Follow that link to learn who is eligible to join.
3. Contact credit unions you're interested in. Find out if they offer a traditional PAL or PAL II. 

What you’ll need to supply

To apply for a PAL, you’ll likely be asked for the following:

• Identification: Typically, a driver’s license or passport will do.
• Proof of address: A bill mailed to your home with your name and address works.
• Your Social Security number: This is also for verifying identity.
• Where you work: Be prepared to provide your employer’s name, address, and phone number.
• Proof of income: One or two pay stubs should be sufficient.
• How much you’d like to borrow: This will help the credit union figure out your loan terms.

Once you’ve provided the necessary information, the credit union will conduct a hard credit check. Unlike a soft credit check, your credit score may be dinged a bit, but it’s typically nothing to worry about. Once you’ve made several on-time payments, your score will rebound.

If you're in need of a loan, and the borrowing limits and other requirements make sense for your situation, consider a PAL. It can help you avoid a more expensive, less safe loan.