What Is a Payday Alternative A Loan?

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What is a Payday Alternative loan?
PALs, offered through federal credit unions are less expensive than traditional payday loans and give borrowers more time to pay.


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Last updated on 23rd March 2022.

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Payday alternative loans, or PALs, permit members of national credit unions get small amounts of money at a lower cost as compared to the traditional payday loans and repay the loan over a longer period.
These features can aid borrowers in avoiding the debt traps created by for-profit, high-cost lenders.
What is a payday alternative loan?
PALs are regulated through the National Credit Union Administration, which created the program in 2010. The loans must be:
Issued only to those who are members of a credit union for at least one month.
Granted in amounts between $200-$1,000.
Cheap, with a maximal of 28%, including an application fee of no more than $20, which is based on the actual cost of processing.
Repaid completely within one to six months of installments; no rollovers allowed.
Provided one at a time to borrowers; borrowers may not be provided with more than 3 PALs during a six-month period.

In 2019 the NCUA introduced a second option for PALs, referred to as PALs II, which is similar to PALs I, with the following exceptions:
The loan amount can be any up to $2,000.
The term is one to twelve months.
There isn't a month-long waiting period for borrowers; they are eligible to join as soon as their membership is confirmed.

Borrowers are only eligible for one kind of PAL at a time.
How to qualify for a payday alternative loan
A lot of credit unions offering PALs do not require borrowers to have a good credit score. They're more interested in borrowers' income and ability to repay. You might be required to provide proof of income before submitting your application.
Not all credit unions provide PALs. The best way to determine if you are eligible for these loans is to go to its website or call. If you aren't yet registered, you can also ask about eligibility requirements.
These non-profit cooperatives, also known as member-owned cooperatives, can extend membership based on where you live, what religious organization you belong to, the name of your military service, employer or other organizations and causes you are involved in.
It's usually an annual membership fee which can be as little as $5. You might need to deposit an initial amount to fund your account.
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Why do payday alternative loans are better than traditional loans?
Credit unions are designed to assist members in becoming financially stable, and PALs are structured to help customers make timely payments with low interest rates and no extra costs.
This is a stark contrast to traditional high-cost, quick-term payday loans. Payday lenders earn profit when those who cannot repay the loans are able to roll them over and then pay "fees," their term for interest.
A typical fee for a loan ranges from $10 to $30 for each $100 borrowed, and the payment is usually due in two weeks. If a lender charges you $15 for a $100 two-week loan, that's a 391% APR.
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Also payday lenders don't typically report their payments to national credit bureaus, unless you fail to pay, unlike credit unions, which are encouraged to report repayments made to PAL. The history of paying on time could be helpful .
Payday loan alternative loan likes
Official PALs are provided by federal credit unions. However, many state-chartered credit unions have similar products. Some federal credit unions that don't offer official PALs have their own variants that offer payday alternatives loans.
Credit union loans which aren't officially PALs may have an APR of 18.9% according to the federal law. That may be more affordable than a PAL with a 28% APR, however lenders might also require stricter conditions for eligibility.
Online, borrowers may discover lenders who adopt the "payday alternative loan" language, but the fine print will indicate it's not a credit union , and its loan terms aren't consumer-friendly.
For an loan in order to remain affordable most financial experts agree the APR should not be more than 36%.
Other credit union small-dollar loans
Both state and federal credit unions offer other loans that help members improve their finances and reduce the need for payday loans. Some of these include:
Dedicated purpose loans The loans are designed to cover one-time, large costs. Self-Help Federal Credit Union, for example, offers a $680 to $1,000 citizenship loan to help cover the costs to apply for citizenship as well as legal fees. Terms are up to 36 months at an APR of 17.7% APR.
They loans assist members to improve their credit scores, so that they will be able to qualify for lower cost loans later on. A credit union offers the loan however, it will keep the loan in an account for savings till when the loan is paid off.

Traditional credit union alternatives
Credit unions also provide more traditional financing products like individual loans as well as personal credit lines.
With a , you take out the entire amount needed upfront and make payments on it. In comparison to loans that are offered by banks and online lending, credit union personal loans can be easier to qualify for and have lower interest rates, especially for those with fair or bad credit applicants.
A is similar to credit cards. You are accepted up to a specific limit, however you can borrow only what you need and pay interest only on the amount you borrowed.
If you're having difficulty getting approved for an affordable loan Look for credit unions classified as CDFIs. CDFIs, who focus on providing services to communities with low incomes, are less dependent on credit scores to provide financial products.



The authors' bios: Liz Weston is a columnist at NerdWallet. The financial advisor is licensed as well as the author of five books about money, including "Your Credit Score."


Amrita Jayakumar was a former writer for NerdWallet. She has previously worked for The Washington Post and the Miami Herald.


Jackie Veling covers personal loans for NerdWallet.







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