When you’re strapped for cash with an overdue bill or emergency expense, a payday loan may seem like the only short-term solution. Yet payday loans are some of the most predatory lending products on the market. In fact, they’ve even been outlawed in numerous states. With short terms and massive interest rates, payday loans have the potential to worsen your financial circumstances long-term.
Luckily, there are affordable alternatives to payday loans available through credit unions.
Credit unions are like banks, but they’re owned by their members and don’t operate for profit. Their role is to serve their members’ financial needs, not to profit off of transactions (or financial turmoil).
In this guide, we’re exploring more financially sound, affordable alternatives to payday loans to help you find financial relief without bowing to predatory lenders.
Understanding Traditional Payday Loans
Payday loans are simple in practice: Borrowers approach a payday lender, request a small loan (typically for $500 or less), and agree to pay the loan back when they receive their next paycheck. Hence the term “payday” loan.
While this doesn’t sound inherently predatory, payday lenders:
- Charge astronomically high interest rates and fees – Lenders typically charge fees between $10 and $30 per $100 borrowed. In a typical two-week payday loan, a $15 per $100 borrowed translates to an almost 400% annual percentage rate (APR).
- Automatically bill your checking account if they aren’t repaid – If you don’t repay your loan by the end of your term (which is typically two weeks), the lender can automatically take the funds from your checking account. If you have insufficient funds or are already overdrafted, this could subject you to various bank fees and penalties.
When your power company is threatening to turn the lights off and your paycheck doesn’t come for another week, borrowing from a payday lender can seem like an attractive solution. But borrowers should consider less predatory options that don’t jeopardize their long-term financial health.
Payday Loan Alternatives and Credit Union Options
Luckily, credit unions offer some of the most affordable (and least predatory) payday loan alternatives on the market today. Credit union short-term lending products typically offer:
- More forgiving interest rates
- Longer repayment terms
- Personalized customer support
- Financial counseling for long-term financial improvements
Let’s explore a few of these options in more detail.
Payday Alternative Loans (PALs)
Payday alternative loans (PALs) are the most similar to traditional payday loans, but they’re significantly less detrimental to your financial health.
There are two types of PALs available: traditional PALs and PALs II.
Traditional PALs
- Issued to people who have been credit union members for at least one month
- Offered in amounts between $200 and $1,000
- Lower interest compared to payday loans, with a maximum APR of 28%
- Repaid in installments over a one- to six-month period
- Provided to borrowers one at a time
Traditional PAL borrowers must pay an application fee to qualify for a loan, but this fee must reflect the credit union’s actual processing costs and cannot exceed $20.
PALs II
In 2019, the National Credit Union Administration (NCUA; a regulatory body for credit unions) introduced PALs II. They’re similar to PALs, but have a few key differences:
- PALs II loans can be for any amount up to $2,000
- Repayment terms are one to twelve months
- Borrowers are eligible as soon as their memberships are established—there’s no month-long waiting period
It’s important to note that borrowers are only eligible for one type of PAL loan at a time.
Personal Installment Loans
Credit unions and other financial institutions offer personal installment loans to borrowers looking to make large or unexpected purchases or consolidate existing debt. Personal installment loans are:
- Closed-end loans, meaning that the lender gives a borrower all of the money at once
- Paid back in fixed installments over a set term (ranging from months to years)
- As small as a few hundred dollars or as large as a few thousand
Unlike payday loans and PALs, lenders will assess a borrower’s creditworthiness before lending the funds. In addition, some lenders might use third-party debt collectors if you miss a payment, pay late, or make an incomplete payment.
Salary Advance Loans
Salary advance loans (sometimes called check advance loans) are offered by many credit unions. They provide a portion of your direct deposited paycheck in advance (before it’s deposited) and automatically bill your checking account (with any interest) once you receive your paycheck.
Like payday loans, salary advance loans aren’t right for everyone. While multiple lenders offer them, many credit unions will take steps to promote responsible borrowing with salary advance loans—for instance, automatically depositing a portion of your next check into a savings account anytime you request a salary advance.
Small-Dollar Loan (SDL) Programs
Small-Dollar Loan programs (SDLs) are some of the most important lending products credit unions offer. PALs technically fall under the umbrella of SDLs, but other types include:
- Small unsecured loans
- Savings clubs
- Emergency loans
While terms, interest rates, and lending amounts vary based on the specific loan type, these options are all highly likely to be more affordable and less predatory than traditional payday loans. In addition, many credit unions offer free financial education and responsible borrowing counseling to members who need long-term financial support.
Which Payday Loan Alternative Is Right for You?
There are multiple credit union lending products available, but which one is right for your financial situation? Let’s explore a few hypotheticals:
- I have a bill due, but I haven’t gotten paid yet. – If you won’t have enough money to cover a bill that’s due before your next paycheck comes, consider a PAL, salary advance loan, or an SDL product. But consider asking your credit union for financial education or other counseling support after you apply to help establish better budgeting habits in the future.
- I have a major medical procedure coming up. – If you have to pay for an unexpected major expense (like a medical procedure or home repair), consider a loan product with a longer term like a PAL II or personal installment loan. If you’re already in poor financial health, you may not qualify for a personal installment loan; but you should talk to a credit union loan counselor or another finance professional about your odds of approval.
- I’m in credit card/medical debt and want to consolidate. – If you’re looking to consolidate debts, a personal installment loan is likely the best option. If you don’t qualify, consider reaching out directly to lenders for advice. Some credit card companies and other lenders offer grace periods, refinancing, or payment plans for high-interest debt, and these can offer temporary relief whether or not you supplement your finances with a loan.
Payday Loan Alternatives with Credit Unions: Protecting Your Long-Term Financial Security
If you’re struggling to cover a significant expense, consider a short-term, lower-cost lending product from a credit union instead of a traditional payday loan to protect your long-term financial health and get help as securely as possible.
With that said, credit unions are useful for so much more than lending—credit unions also offer excellent interest rates for savings accounts and share certificates, specialty loan products, and low-cost banking alternatives.
If you’re interested in joining a credit union or learning more about their services, locate a credit union near you.
