How does a payday alternative loan work?

Payday alternative loans (PALs) are small-value loans offered by federal credit unions. PALs are allowed by the National Credit Union Administration as long as certain guidelines are met.

First and foremost, you must be a member of the credit union, and you must have been a member for at least a month prior to applying for a payday alternative loan. As a result, if you think you may come to rely on payday loans in the future, you may want to join a credit union in advance. Credit unions have varying membership rules and fees, but they often offer a slate of affordable banking products. So there could be other benefits to joining one as well.

For eligible credit union members, payday alternative loans come in amounts between $200 and $1,000 and have repayment terms between one month and six months. This is typically a longer repayment timeline than most payday loans. That means you’ll be less likely to end up having to borrow again immediately to pay off your loan balance since you’ll make smaller payments over time.

Where payday alternative loans really stand out is the cost. The application fee will be capped at $20. And the maximum interest rate on these small-dollar loans is 28%. While this is higher than you’d pay with most standard personal loans, it’s still well below the effective rate on payday loans, which could top 400%.

Borrowers can take out up to three PALs during any six-month period but can’t roll one over into the other. If you are facing financial hardship and you need to borrow a small amount of money for a short time, this could be the perfect answer for you.

Of course, just because these loans are cheaper than payday loans doesn’t mean they are cheap. You should borrow only if you need to and borrow the minimum required to cover essential expenses.

Once you’ve paid off your loan, try to start saving an emergency fund so you won’t have to take out a loan to cover unexpected expenses in the future. Ideally, your emergency fund will have enough money to cover three to six months of living expenses. But it’s OK if it takes time to get to that level. Saving even a small emergency fund with a few hundred dollars could help you with surprise costs so you don’t have to borrow with an emergency loan in the future.