Alternatives to payday loans | The Motley Fool

How does an alternative payday loan work?

Alternative payday loans (PAL) are low value loans offered by federal credit unions. PALs are permitted by the National Credit Union Administration as long as certain guidelines are followed.

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

For eligible members of credit unions, alternative payday loans are for amounts between $200 and $1,000 and have repayment terms between one month and six months. This is usually a longer repayment term than most payday loans. This means you’ll be less likely to have to borrow again immediately to pay off your loan balance, as you’ll make smaller payments over time.

Where alternative payday loans really stand out is the cost. The application fee will be capped at $20. And the maximum interest rate on these small loans is 28%. Although this rate is higher than what you would pay with most standard personal loans, it is still well below the effective rate for payday loans, which could exceed 400%.

Borrowers can take out up to three PALs in a six-month period, but cannot switch between them. If you are struggling financially and need to borrow a small amount of money for a short period of time, this might be the perfect answer for you.

Of course, just because these loans are cheaper than payday loans doesn’t mean they’re cheap. You should only borrow 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 don’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 doesn’t matter if it takes time to get to that level. Saving even a small emergency fund with a few hundred dollars could help you cover unexpected costs so you don’t have to borrow with an emergency loan in the future.

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