Key takeaways
- Payday alternative loans are small installment loans from federal credit unions, capped at 28% interest with an application fee of no more than $20.
- PAL I loans run $200 to $1,000 over one to six months and require at least one month of membership.
- PAL II loans go up to $2,000 over up to 12 months, with no minimum membership period.
- Rollovers are not allowed, and you can have only one PAL at a time and no more than three in six months.
In this guide
Payday alternative loans (PALs) are small installment loans offered by federal credit unions under National Credit Union Administration rules. Interest is capped at 28%, the application fee can be no more than $20, and you repay over one to twelve months. PAL I loans range from $200 to $1,000; PAL II loans go up to $2,000. Rollovers are not allowed.
PALs were created to give credit union members a lower-cost option than payday loans for the same kind of short-term need. Below is how they work, how the two versions differ, what they cost and how to find one.
What is a payday alternative loan?
A payday alternative loan is a small-dollar loan that a federal credit union may choose to offer to its members. The rules are designed to avoid the features that make payday loans risky:
- A capped rate. The maximum interest rate is 28%, compared with payday APRs that often run into the hundreds of percent.
- A limited fee. Any application fee is capped at $20 and is meant to reflect the actual cost of processing the application.
- Installment repayment. You repay over several months rather than in one lump sum on your next payday.
- No rollovers. A PAL cannot be renewed for another fee.
- Limits on repeat borrowing. You can have only one PAL at a time and no more than three in a rolling six-month period.
Because PALs are optional, not every federal credit union offers them. State-chartered credit unions are not bound by the federal PAL rules, though some offer comparable small-dollar loans.
PAL I vs PAL II: key differences
The NCUA added PAL II in 2019 to give credit unions a larger, longer option alongside the original PAL I. A credit union can offer a given borrower only one type at a time.
| Feature | PAL I | PAL II |
|---|---|---|
| Loan amount | $200 to $1,000 | Up to $2,000 |
| Loan term | 1 to 6 months | 1 to 12 months |
| Membership requirement | At least 1 month | None |
| Maximum interest rate | 28% | 28% |
| Application fee | Up to $20 | Up to $20 |
| Rollovers | Not allowed | Not allowed |
| Loans per six months | Up to three, one at a time | Up to three, one at a time |
PAL II is often the better fit if you are new to the credit union or need a bit more time to repay. PAL I may be all you need for a smaller gap if you are already a member.
How much does a payday alternative loan cost?
Because PALs are capped at 28% and repaid in installments, the total cost is usually a small fraction of a payday loan for the same amount.
Your actual cost will depend on the rate your credit union charges (it may be below the cap), the term you choose and whether a fee applies. For a detailed look at how payday fees translate into APRs, see how much payday loans cost.
Who qualifies for a PAL?
Eligibility has two layers: joining the credit union and qualifying for the loan.
Joining a federal credit union
Credit unions serve members who share a common bond, such as where they live, work, worship or attend school, or membership in an affiliated group. Many community credit unions accept anyone who lives or works in a certain area. Joining usually requires a small deposit into a savings account.
Qualifying for the loan
Each credit union sets its own underwriting. Common requirements include:
- Proof of steady income, such as pay stubs or benefit statements.
- Membership for at least one month, if applying for PAL I.
- An account in good standing.
- Identity verification.
Credit unions often weigh your income and account history rather than relying only on a credit score, which can make PALs accessible to borrowers with limited or damaged credit.
PALs vs payday loans
| Factor | Payday alternative loan | Typical payday loan |
|---|---|---|
| Cost | Capped at 28% plus fee up to $20 | Often 300% APR or more |
| Repayment | Installments over months | One lump sum in 2 to 4 weeks |
| Rollovers | Not allowed | Allowed in some states, for a new fee |
| Speed | Often a few days | Same day or next day |
| Lender | Federal credit union | Storefront or online lender |
| Credit reporting | Many credit unions report payments | Often not reported unless sent to collections |
The main tradeoff is speed and access: a payday loan may arrive faster and requires no membership. But the cost difference is large, and the installment structure makes a PAL much less likely to trap you in repeat borrowing. For more on how payday loans work, see what a payday loan is.
How to find and apply for a payday alternative loan
- List credit unions you can join. Check community credit unions near where you live or work, and any tied to your employer, school or family members.
- Ask specifically about PALs. Some credit unions market them under different names, such as small-dollar, emergency or starter loans.
- Join if needed. Opening a savings account with a small deposit typically makes you a member. If you might need a loan later, joining now starts the clock for PAL I.
- Apply with income documents. Bring pay stubs, benefit statements or bank statements and a photo ID.
- Review the disclosure. Check the APR, fee, payment amount, number of payments and total you will repay.
If you are using a PAL to pay off an existing payday loan, it can end the cycle of fees. Our guide to payday loan rollovers explains why that cycle is so costly.
If a PAL is not available
Not every area has a credit union offering PALs, and approval is not guaranteed. Other options include a small loan from your bank, a payment plan with the company you owe, an employer paycheck advance or local assistance programs. Our full guide to payday loan alternatives compares each by cost and speed.
The bottom line
Payday alternative loans give federal credit union members a small, short-term loan with a 28% rate cap, a fee of no more than $20, installment payments and no rollovers. PAL I covers $200 to $1,000 over up to six months; PAL II goes up to $2,000 over up to a year. If you can join a credit union that offers them, a PAL is usually a far safer choice than a payday loan.
Frequently asked questions
What is a payday alternative loan?
A payday alternative loan, or PAL, is a small-dollar loan that federal credit unions can offer under rules set by the National Credit Union Administration. The interest rate is capped at 28%, the application fee is limited to $20, and the loan is repaid in installments over one to twelve months instead of one lump sum on your next payday.
Who qualifies for a payday alternative loan?
You generally need to be a member of a federal credit union that offers PALs. For PAL I, you must have been a member for at least one month; PAL II has no minimum membership period. Credit unions set their own underwriting, often looking at income and your account history rather than relying only on a credit score.
What is the difference between PAL I and PAL II?
PAL I loans range from $200 to $1,000 with terms of one to six months and require at least one month of membership. PAL II loans can be up to $2,000 with terms of one to twelve months and no membership waiting period. Both share the 28% rate cap, the $20 application fee limit and the ban on rollovers.
Do all credit unions offer payday alternative loans?
No. PALs are optional, and many credit unions do not offer them. State-chartered credit unions are not covered by the federal PAL rules, though some offer similar small-dollar loans under their own names. Call or check the websites of credit unions you are eligible to join and ask about small-dollar or emergency loans.
Can a payday alternative loan hurt my credit?
It can help or hurt depending on how you repay. Many credit unions report loan payments to the credit bureaus, so on-time installments may help build your credit history, while late or missed payments can hurt it. Ask the credit union whether it reports PAL payments before you borrow.
Official Resources & Further Reading
Use these resources to check current guidance. Requirements and availability may vary by state and provider.
This guide is for general educational purposes and is not individualized financial, legal, tax or insurance advice. Product terms, rates and availability vary by provider and location. How we make money.
