What Is a Payday Alternative Loan?

If you need a little money to tide you over, a payday alternative loan can let you borrow cash quickly — but without the high price and dangers of a regular payday loan.

Regulated credit unions offer these payday loan alternatives, which can protect you from the predatory lending practices sometimes found with payday loans.

Key takeaways

• Payday alternative loans are small loans from credit unions that let you avoid predatory payday loans.
• Payday alternative loans come with lower interest rates and better repayment terms than payday loans.
• You must be a credit union member to qualify for a payday alternative loan, and there may be a waiting period before you can apply for the loan.

What is a payday alternative loan (PAL)?

A payday alternative loan (PAL) is a small-dollar personal loan from a credit union. They’re a substitute for payday loans, which usually have less favorable terms and are sometimes known for being predatory and charging high fees.

PALs are regulated by the National Credit Union Administration (NCUA), and like payday loans, qualifying for them is usually based on your income, not your credit score.

Unlike payday loans, PAL annual percentage rates (APRs) are capped — at 28% — and they have longer repayment periods, up to six months.

Credit unions can’t issue you more than one PAL at a time, or more than three PALs within any rolling six-month period.

There are two types of payday alternative loans: PALs I and PALs II.

*Some credit unions may extend the waiting period (for PALs I) or require a waiting period (for PALs II).

How to qualify for a payday alternative loan

You generally don’t need good credit to qualify for a payday alternative loan, but you may need to show you have enough income to repay the loan.

You must also be a member of the credit union that offers the payday alternative loan. Some credit unions have strict membership requirements, while others make it fairly easy for anyone to join.

Where to find a payday alternative loan

Payday alternative loans are only offered by federal credit unions, and they can be a little hard to find.

Start by getting in touch with your local federal credit unions to see if any of them offer PALs.

If you can’t find anything, you could also contact state-chartered credit unions in your area. Many of these credit unions offer small loans similar to PALs, and they may even come with lower interest rates — although that can also mean stricter requirements.

Payday alternative loans vs. payday loans

Payday alternative loans come with lower interest rates and longer repayment terms than traditional payday loans, making them easier to manage.

Also, PALs are issued by federal credit unions and regulated by the NCUA, while payday loans are issued by private payday lenders, and regulations vary by state.

Why you should avoid payday lenders

• Many payday lenders use predatory lending practices.
• The flat-rate fees on payday loans can be the equivalent of paying 400% or more in interest.
• You might only have a few weeks to repay the loan.
• You could end up needing another payday loan to pay off the first one, trapping you in a cycle of debt.

Alternatives to PALs

Personal loans

Compared to payday loan alternatives, personal loans usually offer higher loan amounts, longer repayment terms and lower interest rates. They can be easier to find than payday alternative loans, but they do require credit checks.

Borrowers with good credit may want to consider this option because they may qualify for a low interest rate. On the other hand, personal loans for bad credit borrowers can be expensive and might not be the best choice.

Credit card cash advance

With a credit card cash advance, you withdraw cash from your credit card at an ATM, bank branch or online.

You’re borrowing money from your credit card’s line of credit, and this usually comes with a cash advance fee and an interest rate higher than what you pay for regular credit card purchases. Because of this, a credit card advance is a poor option unless you’re in an emergency and need cash immediately.

Paycheck advance app

Also known as cash advance apps, paycheck advance apps — like DailyPay or Dave — let you borrow a small amount of money (usually $10 to $500) against your next paycheck.

You don’t need good credit to qualify because these apps look at your bank account to approve you.

This option might be right if you need a little cash to tide you over until your next paycheck, and you have regular income directly deposited into your bank account. These apps don’t charge interest, but they do charge fees, so avoid using them regularly.

Buy now, pay later

Buy now, pay later (BNPL) apps — like Affirm and Afterpay — are available through many online retailers. As the name suggests, BNPL lets you pay off your purchase over time.

There are usually two types of payment plans: a short-term plan that charges no interest, and a longer-term plan that charges an APR, typically up to 36%.

The short-term option may be good if you know you’ll have enough to pay off the purchase within six weeks. The long-term option is only a good idea if you really need the item and can’t find better financing options.

Borrow from friends or family

If you have friends or family members who can loan you money, borrowing from them might be the best option. Some loved ones might lend you money interest-free, as long as you pay it back quickly. There’s also no credit check or income verification.

To avoid any miscommunication or strain on your relationship, agree on a payment plan together, put it in writing and make sure you can afford to repay the loan.