What is a Payday Alternative Loan (PALs)?

When emergencies arise without enough savings in the bank to cover the immediate expense, a person can be tempted to take out a payday loan to meet their pressing needs. Statistics prove, however, that payday loans more often than not trap borrowers in a vicious cycle of debt that is extremely difficult to break free from. Fortunately, there are other options for consumers to consider, including a payday alternative loan.

What is a payday alternative loan (PAL)?

The National Credit Union Association created a payday alternative loan back in 2010 as a way to provide borrowers with a small loan that could be used to meet important financial needs without the high interest rates and quick repayment requirements that come with traditional payday loans. In order to take advantage of the payday alternative loan, you must be a federal credit union member.

In September of 2019, the National Credit Union Association approved a final rule permitting federal credit unions to offer a new second payday alternative loan, known as PALs II. The organization made it clear that this loan doesn’t replace the original loan but is rather a second option available to federal credit union members. 

How to qualify for a payday alternative loan

Only individuals who have been a member of a federal credit union for a period of at least 30 days are eligible to apply for the original payday alternative loan; however, the PALs II loan has no waiting period. Applicants of both loans must be willing to pay the application fee, which will not exceed $25.

Specific credit union requirements:

Each credit union will have their own qualification requirements. Veridian Credit Union lists direct deposit of paychecks and proof of income as qualifications of their PAL. LG&W Federal Credit Union lists a host of additional requirements to get a PAL through their organization. They require the applicant to be at least 18 years of age, have a six-month work history and a payroll deduction to a savings or checking account at the credit union with a minimum amount of $100.00 monthly.

Additional PALs I requirements:

Individuals who opt for the PALs I loan must take out a minimum of $200. The maximum loan amount is $1,000. The federal credit union will assign a term to the loan ranging from one to six months. While borrowers can request as many as three payday alternative loans in a six-month period, second and third loans will not be issued until the previous loan is paid off.

Additional PALs II requirements:

There is no minimum loan requirement associated with PALs II, but borrowers are capped at taking out up to $2,000. The loan term can range from one month to a full year with only one PALs II loan being issued at a time. This means you can’t open a second PALs II loan until the first one is fully paid for, but also means you can take out an unlimited number of PALs II loans in a six-month period, as long as you keep paying the previous loan off first.

Payday alternatives vs. payday loans

While both payday loans and payday alternative loans allow borrowers to receive a small loan quickly, they differ on every other level. Here are a few examples:

Rollovers:

PALs have a strict prohibition against rollovers, while payday loans can be rolled over multiple times. Each time a hefty fee is added to the principal of the payday loan, making it harder and harder to pay off.

Interest rates:

The Federal Reserve Bank of St. Louis reported that the average interest rate for a payday loan is 391%. Compare that to the PALs’ maximum yearly interest rate of 28%, which happens to be lower than the interest rate on many credit cards.

Repayment timeframe:

Payday loans are typically required to be repaid when the borrower receives his or her next paycheck. In most cases, this occurs about two weeks later, although it can be one month if using a paycheck like Social Security. Depending on which PAL loan a person takes out, a repayment timeframe can be anywhere from one to 12 months. 

Conclusion

If you don’t already belong to a federal credit union, you may want to consider joining one. Planning ahead means you’d be able to take advantage of the PALs I loan if the need should arise. Of course, you could still go for the PALs II loan immediately after establishing membership. Both of these loans are hands-down better options than a payday loan, as they are designed to help you in your time of need without trapping you in a debt cycle.

Many federal credit unions actually offer credit counseling services at no additional cost to their members. Borrowers who take advantage of the PALs or PALS II loans would be wise to sign up for this free counseling, as a review of one’s finances and a new plan may be just what’s needed to get ahead. That way, when future emergencies arise, you’ll be equipped to pay for them using savings instead of having to apply for a loan.