3 ways an alternative payday loan can get you out of a bind


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Avoiding a payday loan saves you money.

Key points

  • Alternative payday loans have maximum interest caps and other requirements that can help protect borrowers.
  • Payday loans, on the other hand, can have extremely high and predatory interest rates.
  • The main qualification for an alternative payday loan is to be a member of a credit union.

Members of credit unions have access to a financial product called an alternative payday loan (ALP). A PAL is an excellent tool to have on hand in the event of a financial problem. Here we cover what a PAL is, how it works, and how it can help you avoid predatory lenders.

What is an Alternative Payday Loan?

A PAL is a type of short-term loan offered by federal credit unions, with guidelines set by the National Credit Union Administration (NCUA). There are two types of PAL: traditional and PAL II.

Here is a brief overview of the rules established by the NCUA for these two types of loans.

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Traditional PAL Rules

  • The maximum interest rate cannot exceed 28%.
  • Credit unions cannot charge more than $20 for application fees.
  • Repayment periods can range from one to six months.
  • Loan amounts must be between $200 and $1,000.
  • A borrower must be a member of the credit union for at least one month.

Rules for a PAL II

  • The maximum interest rate is 28%.
  • Credit unions cannot charge more than $20 for application fees.
  • The repayment periods are between one and 12 months.
  • Loan amounts can be up to $2,000.
  • A borrower must be a member of the credit union, but can apply upon joining.

It is up to a credit union to decide what type of loan it offers. However, members can only obtain one type of loan at a time. Here are three ways a PAL could benefit you.

1. There’s no need for a payday loan

Payday loans are notoriously expensive and, for some, financially dangerous. Not only do these loans often carry an interest rate of over 400%, but they are also difficult to obtain. If you can’t repay the loan when it’s due, you might have to take out another loan to pay off the first one, which would get you into a high interest rate trap.

2. You will have faster and easier access to money

When your name is on a bank account, you are a customer. When you have an account with a credit union, you are a member owner. And because each member has one vote to elect board members, you are no more (or less) important than the other members.

This means that it may be easier to qualify for a PAL than to qualify for a personal loan from a traditional bank – simply because of your owner-member status and the fact that credit unions have more flexibility in loan approval.

3. You’re not stuck in a debt trap

Depending on whether your credit union offers a traditional PAL or a PAL II, the duration of your loan will be between one and 12 months. You won’t have to pay the full amount two weeks later, and you’ll be less likely to need to take out another loan to pay off the first one.

What to do to qualify for a PAL

If you are already a member of a credit union, qualifying for a PAL is as easy as filling out an application. If you are not yet a member, you will need to arrange membership first.

Find a credit union

Joining a credit union is easier than it looks. Typically, credit unions want members to meet specific requirements. For example, a credit union could be designed for teachers or pipefitters. On the other hand, a credit union may accept members who live in a particular county. Some credit unions even allow you to join if you donate to charity.

You can find the right credit union for you by following these steps:

  1. Use the credit union locator tool on MyCreditUnion.gov. If you type in your zip code, a list will appear with the credit unions closest to your home.
  2. Each credit union on the list includes a link to its website. Follow this link to find out who is eligible.
  3. Contact the credit unions that interest you. Find out if they offer a traditional PAL or a PAL II.

What you will need to provide

To apply for PAL, you will likely be asked the following:

  • Identification: Generally, a driver’s license or passport will suffice.
  • Proof of address: A bill mailed to your home with your name and address works.
  • Your social security number: This is also to verify identity.
  • Where do you work : Be prepared to provide your employer’s name, address and telephone number.
  • Proof of income: One or two payslips should suffice.
  • How much do you want to borrow: This will help the credit union determine the terms of your loan.

Once you have provided the necessary information, the credit union will conduct a thorough credit check. Unlike a soft credit check, your credit score may be slightly affected, but that’s usually nothing to worry about. Once you have made several payments on time, your score will rebound.

If you need a loan and the borrowing limits and other requirements are right for you, consider a PAL. This can help you avoid a more expensive and less secure loan.

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