When people need cash fast, they sometimes take out payday loans, which are short-term loans with high fees and interest rates. However, there are better options, such as a payday alternative loan (PAL). This is a small loan offered by some federal credit unions and they cost much less than a payday loan and allow you more time to pay it back.
In this article, we’ll cover the differences between payday loans and PALs, as well as other loan options that may work for you.
- What is a Payday Alternative Loan?
- What’s the difference between a payday loan and payday alternative loan?
- How to qualify for a payday alternative loan
- Other borrowing options for payday alternative loans
- Find the right loan for your situation
What is a payday alternative loan?
A payday alternative loan is a loan ranging from around $200 to $1,000. This loan helps people who need quick cash to cover unexpected expenses, such as home repairs or medical emergencies. The National Credit Union Administration regulates PALs, and there are two types of PAL loans: PAL I and PAL II.
To help protect borrowers from the dangers of payday loans, PAL I loans are:
- To be repaid in full after one to six months of payments.
- Much more affordable than payday loans. There’s a maximum APR percentage that can’t be exceeded for a payday alternative loan. Application fees are also capped at $20.
- Given to borrowers one at a time. A borrower may not take out more than three PALs in a six-month period.
- Available only to those who have been a member of a credit union for at least one month.
PAL II is a payday alternative loan option that rolled out in 2019. The rules for PALs II are very similar to PALs, but with larger loan amounts (up to $2,000), longer terms (up to 12 months), and no waiting period as a credit union member. This means you can borrow as soon as you become a member.
Terms of a payday alternative loan
Here are the terms for PAL I and PAL II:
PAL I:
- Loan amount: $200 to $1,000
- Loan term: 1 to 6 months
- Fees: Maximum $20 application fee
- Waiting period: At least one month as a member of a credit union
PAL II:
- Loan amount: Up to $2,000
- Loan term: 1 to 12 months
- Fees: Maximum $20 application fee
- Waiting period: None
What’s the difference between a payday loan and payday alternative loan?
The basic idea behind a payday loan and a payday alternative loan is the same: borrowing a small amount of cash quickly and repaying it over a short period of time. But there are some big differences between these two loans. It’s important to understand these differences because they can save you money and help you avoid future financial problems.
Eligibility
Alternative payday lenders are credit unions. Only credit union members can get payday alternative loans. You have to join a credit union first and meet their membership requirements. Payday loans are different—they are available to almost anyone.
Most payday lenders don’t check if you belong to any special group or organization. They just want to see that you have a job and can pay the loan back.
Loan amount
When it comes to the loan amount, a payday lender will typically provide up to $500. However, you can borrow up to $2,000 with a PAL.
Annual percentage rate (APR)
The biggest difference between a payday loan and a PAL is the annual percentage rate. This is the combined total of the interest rate and the origination fee of a loan, calculated on a yearly basis and represented as a percentage.
Fees
According to the Consumer Financial Protection Bureau, the typical fee for a payday loan is between $10 and $30 for every $100 borrowed. For example, if you were to borrow $500 on a payback loan, you could be charged up to $150. That means when you pay back the loan, you’re now repaying $650.
Borrowing restrictions
Payday lenders often let you roll over your loan if you can’t pay it back on time. This might sound helpful, but it creates a debt trap. You end up paying more fees and interest, which can put you in a cycle of debt.
PALs have strict rules to protect you. You can only have three PALs in a six-month period, and you cannot roll over the loan or extend it. This forces you to pay it off and avoid getting trapped in debt while helping you break bad money habits.
Repayment terms
Payday loans typically give you only two weeks to repay the full amount. If your next paycheck doesn’t cover the loan plus fees, you’re in trouble. Many people can’t pay it all at once.
PAL repayment terms are much more reasonable. You have one to twelve months to repay the loan, and you make small payments over time instead of a single large payment. This makes it easier to fit into your budget.
Reporting to credit bureaus
Most payday lenders don’t report your payments to credit bureaus. This means paying back a payday loan on time won’t help build your credit score. However, if you miss payments, they may send your debt to collectors, which can harm your credit.
Credit unions often report payday alternative loan payments to credit bureaus, so making on-time payments will help you increase your credit score. This is another way PALs can benefit your financial future.
How to qualify for a payday alternative loan
To qualify for a payday alternative loan, you have to be a member of a credit union that offers this type of loan. Membership requirements for a credit union may vary, so contact credit unions near you to determine their specific requirements for members. These requirements may include:
- Living in a specific area
- Working for a particular company or industry
- Belonging to a certain religious group
Other credit unions might only require a small deposit into an account or a donation to a specific charity.
There’s no minimum credit score needed to qualify for a PAL. Still, a credit union may ask to see pay stubs as part of the loan application. However, understanding your credit score is always important because it affects other loan options you might consider if a PAL isn’t available to you.
Keep in mind that not all credit unions offer payday alternative loans. You’ll need to call and ask if they have these programs. Some credit unions focus on other services, such as savings accounts and car loans.
Additionally, some credit unions might charge a small membership fee when you join. You might also need to keep a minimum balance in a savings account to maintain your membership active.
Other borrowing options for payday alternative loans
If you’re a credit union member or can join one, you can take advantage of the benefits a PAL has to offer—inexpensive fees, a capped APR %, and longer loan terms. But they are far from the only option. There are several other types of loans that can help in your situation.
Here are a few payday loan alternatives you might consider instead:
Personal loans
Lenders offer personal installment loans that you pay back over time. These loans usually have lower interest rates than payday loans. You’ll need decent credit to qualify, but the terms are much better.
There are different types of personal loans available, including secured loans that require collateral and unsecured loans that don’t. If you’re wondering how to get a personal loan, check your credit score and compare options from different lenders.
Credit cards
You can use your available credit for emergency expenses. Credit card interest rates are high, but they’re still lower than payday loan rates. Try to pay off the balance quickly to save money.
Family loans
Borrowing from people you know can be affordable since there are no fees or interest. Make sure you agree on repayment terms upfront. Put the agreement in writing to avoid problems later.
Cash advance apps
Cash advance apps let you access money you’ve already earned before payday. These usually charge small fees and high interest rates.
Find the right loan for your situation
Alternatives to payday loans are much better than traditional payday loans. With lower fees, reasonable interest rates, and longer repayment terms, PALs can help you handle financial emergencies without creating a debt trap.
While PALs aren’t available everywhere and require a credit union membership, they’re worth considering if you qualify. The money you save on fees and interest can make a difference in your budget.
Financial emergencies happen to everyone. Sun Loan specializes in personal installment loans with manageable monthly payments. If a PAL isn’t available to you or doesn’t meet your needs, our personal installment loans could be the right solution for your situation.
