Payday loans have received a lot of criticism over the years for their high interest rates and fees that can trap borrowers in a cycle of debt. However, there is an alternative type of small-dollar loan that can help borrowers avoid some of the pitfalls of traditional payday loans – the payday alternative loan (PAL).
PALs are offered by credit unions and have more consumer-friendly terms and regulations. This article will provide an overview of payday alternative loans and explain their key benefits compared to payday loans.
What are Payday Alternative Loans?
Payday alternative loans (PALs) are small, short-term loans offered by credit unions as an alternative to payday loans from payday lenders. They were first established in 2010 when the National Credit Union Administration (NCUA) implemented the PALs program. The purpose was to enable federal credit unions to provide members with small loans at lower interest rates than traditional payday loans.
Here are the key features of PALs:
- Loan Amount: Up to $2,000
- Term Length: 1 to 12 months
- Interest Rate: 28% APR cap (much lower than payday loan APRs of 400% or more)
- Fees: Application fee of up to $20 permitted, no other fees
- Repayment: Structured in equal installments with no balloon payments
Credit unions must follow the regulations outlined by the NCUA for their PALs program. Loans are intended to help borrowers get through a short-term cash flow shortage until their next paycheck.
Key Benefits of Payday Alternative Loans
Payday alternative loans have many advantages over traditional payday loans:
Lower Interest Rates
The most notable benefit is the interest rate cap of 28% APR for PALs from federal credit unions. This is significantly lower than the average 400% APR on a typical payday loan. Payday lenders can charge such exorbitant rates because payday loans are exempt from state usury laws. The interest rate cap on PALs protects borrowers from predatory lending.
Longer Repayment Terms
Payday loans typically have repayment terms of 2 to 4 weeks when the borrower receives their next paycheck. This short timeframe can make it very difficult to repay the full loan amount plus fees in such a short timeframe.
PALs have repayment terms between 1 and 12 months with installments spread out over that period. This longer timeframe and structured repayment schedule provides more affordability and flexibility. Borrowers have smaller installment payments rather than one large lump sum.
No Rollovers or Extensions
Payday lenders commonly offer extensions or “rollovers” of the loan if the borrower cannot repay on time. However, rollovers lead to additional fees being applied and the debt can rapidly snowball.
PAL regulations prohibit rollovers or extensions, preventing borrowers from being caught in a predatory cycle of debt.
Improved Credit Union Membership
To qualify for a PAL from a federal credit union, borrowers must first become members. This credit union membership provides opportunities to benefit from other products and services such as savings accounts, checking accounts, financial counseling, and improved borrowing opportunities in the future.
Improved access to mainstream banking services can help financially vulnerable households. Getting a PAL from a credit union establishes a banking relationship beyond just taking out a short-term loan.
Because credit unions are member-owned non-profits, their incentive is to serve members rather than make profits for shareholders. The PALs program specifically aims to provide an affordable small loan option, not maximize revenue from fees and interest rates.
This mission-driven focus results in more consumer-friendly loan terms that benefit borrowers rather than just the lender.
PALs Program Performance and Impact
The PALs program has experienced steady growth since its inception, indicating there is meaningful demand for affordable payday loan alternatives. According to NCUA data:
- Over 1,100 federal credit unions offer PALs as of March 2022.
- Credit unions issued more than $123 million in PALs in 2021.
- The average loan amount was $722, showing loans are meeting short-term needs.
- Delinquency rates have remained low at around 2 to 3%.
These metrics show PALs are effectively serving their purpose – providing small-dollar loans with more reasonable terms than payday loans. The delinquency rates indicate borrowers are able to manage the repayment terms responsibly.
Research on the impact of PALs shows promising results:
- PAL borrowers are more likely to improve their credit scores compared to payday loan borrowers.
- Access to PALs reduces the incidence of payday loan use. Credit union members with PAL eligibility borrow from payday lenders 50% less than members without access.
- PALs help borrowers avoid the spiraling “debt traps” common with payday loans.
While the $2,000 maximum loan amount does constrain the ability to meet some borrower needs, overall evidence indicates PALs are an effective alternative to traditional predatory payday lending.
Eligibility Requirements for Payday Alternative Loans
Each credit union establishes its own eligibility criteria for PAL applications, but they must meet the NCUA requirements. Here are the standard qualifications to get a payday alternative loan:
- Credit union membership: You must join the credit union and establish membership before applying for a PAL. This may require paying a membership fee and maintaining a small amount of funds in a savings account.
- Time as member: Some credit unions require you to be a member for at least one month before applying.
- Income verification: Proof of steady income will need to be verified to determine affordability. Income sources can include employment, disability payments, alimony, etc. Self-employed individuals may have to provide additional documentation.
- Creditworthiness: While credit scores are considered, having bad credit does not automatically disqualify you. Criteria may vary by credit union.
- Debt-to-income ratio: Your total monthly debt payments compared to income will be evaluated (often a maximum of 50%).
- No outstanding loan defaults: You must be current on all existing obligations with the credit union.
- Financial counseling: Some credit unions require free counseling prior to taking out the loan.
As long as you meet the eligibility criteria, have proper documentation, and submit a complete application, you should be able to get approved for a PAL. The requirements are designed to ensure you can repay successfully.
How to Apply for a Payday Alternative Loan
Here is an overview of the typical payday alternative loan application process:
- Choose a credit union that offers PALs and that you are eligible to join based on residence or employer.
- Become a member by paying the membership fee and opening a savings account with the required minimum balance.
- Complete the PAL application and gather required income verification documents. Applications are available on credit union websites or at branches.
- Undergo credit check and review of debt-to-income qualifications. The credit union will perform an underwriting evaluation.
- Provide any additional documentation requested by the credit union such as pay stubs, tax returns, etc.
- Complete financial counseling if required by the credit union prior to loan approval.
- Get notification of the loan decision which may take 1-2 weeks depending on the credit union. Follow up if you have not received a decision.
- Accept the loan terms if approved and provide signatures to complete any necessary paperwork.
- Receive loan funding which is typically deposited directly into your credit union account, minus any application fees.
- Begin making payments based on the monthly installment schedule. Set up automatic payments if possible.
Alternatives to Consider Before Opting for a PAL
While payday alternative loans are much safer than payday loans, they should still be considered as a last resort short-term financial option due to the cost. Before pursuing a PAL, exhaust other alternatives:
- Request an advance on your paycheck from your employer if possible.
- Ask for extensions or alternate payment arrangements on outstanding bills.
- Apply for assistance programs such as utility bill grants or food banks.
- Get a cash advance from a credit card rather than a payday or PAL.
- Borrow from family or friends informally at no interest.
- Use overdraft protections or linked savings accounts rather than short-term loans.
- Consider credit union or bank personal loans which may have lower rates for those with better credit.
Only use payday alternative loans as a near-term solution if you have no other viable options and have a realistic plan to repay the loan in full based on the installment schedule. Use the credit union membership to build savings and improve your financial situation over time.
Key Takeaways on Payday Alternative Loans
Payday alternative loans from credit unions provide critical access to affordable short-term credit for those who do not qualify for other mainstream options. The key benefits include:
- Lower interest rate cap of 28% APR vs 400%+ on payday loans
- Longer 1-12 month repayment terms with no lump sum due
- No ability to rollover or extend the loan
- Improved membership access to credit union services
- Better consumer protections and non-profit orientation
For qualifying borrowers, PALs are a prudent alternative to avoid the debt traps inherent with payday loans. Do thorough research, understand eligibility requirements, and evaluate repayment capacity before applying. Use PALs only as a temporary solution while striving to build financial stability through the credit union relationship over time.
What are the fees on a payday alternative loan?
The only fee that can be charged on a PAL is an application fee up to $20. Credit unions cannot charge any interest fees, rollover fees, or late fees. This prevents hidden costs.
How quickly can I get funds from a PAL?
After being approved, you typically can receive PAL funds deposited into your credit union account within 1-2 business days. This provides faster access than many other small dollar loan options.
Can I get a PAL with bad credit?
Having poor credit does not automatically disqualify you from getting a PAL, but it may impact eligibility depending on the credit union’s criteria. Your entire financial profile is reviewed, not just credit scores.
Do I have to be employed to get a payday alternative loan?
Stable income is required to qualify, but being formally employed is not always necessary. Retirement income, alimony, disability payments, and other verifiable and consistent monthly income can potentially be used to qualify.
Can I have more than one PAL at the same time?
Most credit unions restrict borrowers to only one outstanding PAL at any given time to avoid over-borrowing. You typically have to fully repay a PAL before getting approved for another.
What happens if I miss a payment on my PAL?
Missing payments will result in late fees and negatively impact your credit union account standing. However, defaulting on a PAL will not incur penalties as severe as defaulting on a payday loan which can lead to collections actions.