What Is A Payday Alternative Loan

Alternative Loan

When people find themselves in financial hardship, an economic solution is sought straight away. Sometimes, it can take time to go through the application process, approval, and disbursement for these products. Often emergencies don’t allow a significant timeframe. 

While there are a few options at a borrower’s disposal, such as credit cards, emergency loans, and personal loans, people often turn to predatory lending to obtain instant results. This comes in the form of payday loans, an expensive form of borrowing.

In many situations, a loan of this sort will require massive APR or annual percentage rates ranging as high as 400%. A product many individuals might not be aware of instead of these exorbitant options is their alternative, the “payday alternative loans.”

There are a couple of options in the PAL category. Let’s look at the product in a general overview to make you aware of what it is and how it works. Follow along.

What Is A Payday Lending

A payday loan is undoubtedly a resource from which you can obtain fast cash. Unfortunately, taking advantage of the benefit can result in an excessive expense, far more than what you borrowed initially. That’s considering the APR can exceed upwards of 400%. 

These wouldn’t necessarily be the nightmare they sometimes become if the borrower could return the funds they borrowed as soon as the due date comes around. 

But, sadly, in the majority of cases, not many people can repay the balance in full. That means carrying the balance with this exorbitant interest to the following due date. Of course, at that point, it is costly, and once again, the individual cannot afford the balance, and thus the vicious debt cycle begins.

The suggestion is these scenarios can potentially be avoided with an alternative option to the payday loan. It is referenced, in fact, as a “payday alternative loan.” Check this site for loans you can get in a day that also might serve as alternatives to the payday loan.

The payday alternative loan boasts the possibility of being a lower-cost option than the traditional payday loan. These offer lower APRs and fees, helping to prevent the potential for debt cycling. 

Some federal credit unions supply these products with two options: the conventional PAL and PAL II. PAL II was approved by the National Credit Union Administration in 2019. 

What Is Payday Alternative Lending

A payday alternative loan or PAL is reminiscent of the traditional product in the sense it is a small loan taken for a short term. 

Federal credit unions usually provide specific criteria that need to be met based on National Credit Union Administration guidelines. This organization regulates credit unions throughout the US. Click for details on PALs.

There are two PAL options offered by federal credit unions with specific rules in place for each:

  1. The individual borrowing the funds must be a credit union member for no less than a month.
  2. The balance limit needs to fall between “$200 and $1000.”
  3. The term for repayment is short, with no loan repayment going beyond six months.
  4. Credit unions are not permitted to charge greater than $20 for an application fee to cover the processing of the document.
  5. Interest rates can’t go above 28%

PAL II has similar rules, but some differences do apply.

  1. Borrowers must be credit union members, but there’s no specific minimum requirement.
  2. Balance limits can range up to $2000.
  3. Terms for repayment can’t exceed 12 months.
  4. The application fee is also maxed at $20 for processing the document.
  5. For the time being, the interest rate is also to remain at no greater than 28%.

Credit unions have the choice to offer either option for the members, but you can only choose one or the other. Each credit union will have varied restrictions that meet NCUA guidelines.

PALs vs. Payday Lending

Payday lending and the PAL options are unique in several ways especially considering who offers the products.

  • PAL

Payday alternative loans are provided to borrowers by certain federal credit unions, and these are the only places where these are offered. These are member-owned organizations that are nonprofit with federal government regulation. Their goal is to provide their members with financial solutions at reasonable rates.

  • Payday lending

These are provided to borrowers by for-profit storefronts or online loan agencies, often viewed as “predatory lending.”

  • Loan balances, terms, and fees

The suggestion is borrowers have the potential to obtain more funds with the PAL. These can be available in amounts as significant as $2000. A traditional payday loan can only be accepted for no greater than $500.

The PALs are less expensive than the traditional products, which makes the borrower responsible for between “$10 and $30 for each $100 borrowed.” That essentially equates to an APR of roughly 400%. 

The most significant amount permitted for an application fee with the PAL loans is $20. These also offer longer terms for repayment, with the most extended period being 12 months. With a payday loan, the due date is the next time the borrower receives a paycheck or within 14 days.

  • Loan criteria

PALs require that those applying be a member of the credit union. For the traditional PAL, you must be a member for no less than a month before applying. PAL II has no minimum timeframe before you can apply. 

It’s suggested that a borrower must meet “basic financial criteria,” perhaps disclose the reason for the loan, and have no bankruptcy on their credit.

A traditional payday loan is simple to qualify for. The provider will check for an active bank account, ensure you are of proper age, and have proof of income. 

The lender, however, usually doesn’t consider whether or not you’re capable of repaying the loan as a reason to approve or deny the application. It’s solely your responsibility to ensure you’ll be able to pay it back in time.

Traditional payday loans are prohibited in some states, while those that allow them often put stringent restrictions on their interest rates and fees, causing the lenders to opt out of offering loans in those areas.

  • Rollovers

A traditional payday lending agency will allow borrowers to roll over their balance multiple times, increasing their product’s balance exponentially. It’s indicated that the “Consumer Financial Protection Bureau” found borrowers taking numerous loans in order to juggle their repayments. 

Each time there’s a rollover, additional interest and fees are attached, trapping the individuals in cycles they can’t break free from. With PALS, there’s not as great of a risk. A borrower is restricted to only being able to get one of these at a time, reducing the chance for debt cycles.

What Are Alternatives To Payday Lending

In either situation, payday lending might not appeal to all borrowers. On the one hand, there’s the designation of a “predatory” climate with exorbitant APRs attached to a relatively small principal. 

The risk of being unable to repay on the due date leaves you with the potential for an excessive expense above and beyond what you borrowed. That means you cannot afford to repay even with the next due date, eventually leading to an extreme debt cycle.

Payday alternative loans do show as much more realistic and less risky, possibly a bit more challenging to get approved, but not terrible. The issue some people might have is the need to become a member of a credit union. 

Nothing is required of you, specifically if you become a federal credit union member. You simply get the perks of being a member of their financial institution essentially. But not everyone wants to participate, and that’s cool.

There are alternatives if you’re in dire need and can’t wait for formal approval for an emergency or a personal loan since these could take roughly 24 hours instead of offering instant cash.

  • Reach out to the community

If your utilities are at risk for disconnection or you have medical costs that need to be taken care of, reach out to the community and contact the creditors. 

Utility providers are very forthcoming with extensions to allow extra time to come up with the funds, sometimes offering an extra two weeks or even an additional month. Still, it will tack on that month’s charges to the past due amount. 

Still, it will give you time to reach out to churches, Community Action Council, and even family and friends for assistance. Perhaps, take on a side gig to attempt to earn the funds until you can get approval for an emergency or personal loan to pay back what you use from these resources.

  • Credit counseling

A credit counselor can help you establish a budget that might help you find funds you might be overlooking. Check online for nonprofit help to allow a fresh perspective on your situation. 

Once you have a budget in line, you can see if a personal or emergency loan is necessary and, if so, if you can comfortably afford the added expense.

Final Thought

Payday loans are not suitable for everyone. The payday alternative loans might be of better benefit since they appear less risky, much more affordable, and provide a higher loan amount. 

Their drawback is you need to belong to a credit union or become a member. If you can hold out without needing instant cash, you can choose an emergency or personal loan. 

These can give you approval and disbursement, sometimes within 24 hours. The criteria are somewhat more stringent, but loans are available for those with less than favorable circumstances. 

You can also reach out to the community if you have extreme hardship and feel you have no recourse. The first step is to find a good credit counselor. These are usually free resources with the capacity to get you back on a healthy financial path. There’s always help available.


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