What Is a Payday Alternative Loan (PAL)?

A Payday Alternative Loan (PAL) offers a regulated, small-dollar, short-term lending option as an alternative to high-cost payday loans. Federal credit unions exclusively provide these loans, focusing on member well-being. PALs help individuals address immediate financial needs with more favorable terms than traditional payday products. The structure of PALs helps borrowers avoid the debt cycles often linked to other short-term loans.

Understanding Payday Alternative Loans (PALs)

Payday Alternative Loans were created under the regulatory oversight of the National Credit Union Administration (NCUA), the federal agency responsible for chartering and supervising federal credit unions. The NCUA established the PALs program to offer a safer and more affordable option for short-term borrowing. This framework began with PAL I and was later expanded with PAL II.

These regulations facilitate access to responsible credit for individuals who might otherwise turn to predatory lenders. Unlike many traditional payday loans, PALs are structured to ensure full amortization over their term, with principal and interest paid down steadily. This avoids balloon payments or automatic rollovers that can trap borrowers in a cycle of debt. Federal credit unions are limited to offering only one type of PAL to a member at any given time, further reinforcing responsible lending practices.

Key Features of PAL Loans

PAL loans come with specific characteristics established by NCUA regulations to ensure consumer protection. For PAL I loans, the principal amount ranges from $200 to $1,000. The repayment period for PAL I loans is one to six months. In contrast, PAL II loans allow a maximum principal of $2,000, with repayment terms extending from one to 12 months.

Both PAL I and PAL II loans are subject to a maximum annual percentage rate (APR) of 28%. This rate includes all finance charges, making them significantly less expensive than many traditional payday loans. Credit unions may charge an application fee for PALs, but this fee is capped at $20. Additionally, federal credit unions are restricted from lending more than one PAL to a borrower at a time and cannot “roll over” a PAL into another PAL. For PAL I, a borrower is limited to three loans within any rolling six-month period, while PAL II does not have this specific limitation on the number of loans within a six-month period, provided only one is outstanding at a time.

Eligibility and Application Process

Accessing a Payday Alternative Loan requires membership in a federal credit union. For PAL I loans, applicants must have been a member of the credit union for at least one month before applying. For PAL II loans, the NCUA removed this prior membership requirement, allowing credit unions to offer these loans to new members immediately upon establishing membership, though individual credit unions may still impose their own waiting periods.

Beyond membership, applicants must demonstrate their ability to repay the loan. This involves providing proof of income, such as recent pay stubs or bank statements, and identification. Credit unions assess an applicant’s financial position, including existing debt obligations, to ensure the PAL can be repaid responsibly. The application process for a PAL involves contacting the federal credit union directly, which can be done in person, online, or over the phone.