If you have been looking into getting a short-term loan to help cover unexpected expenses, you’ve likely come across a slew of payday loans. Many financial companies and consultants will highly advise clients to stay away from these loans due to their high costs and consumer’s low ability to repay them.
Payday loans work as short-term lending that grants borrowers typically up to $1000. These loans are not very well regulated as many charge in the high 200 to 300 annual percentage rate for their loans on top of an application fee. These payday loan providers make their money off of the gamble that borrowers will be unable to repay the initial loan plus interest after 30 days. This allows the providers to continue to roll over the loan amount for multiple months and keep compounding interest and fees.
What Are Payday Alternative Loans?
Commonly referred to as PALs, payday alternative loans are a safer alternative for borrowers who need a small-dollar loan. These are only offered at federal credit unions and are made available to members who have been associated with the union for at least a full month.
PALs are typically given in amounts from $200 to $1,000 with a repayment period of up to six months. There is a set maximum annual percentage rate of 28 percent and application fees cap out at $20. These types of alternative loans can only be provided one at a time for each member and no rollovers are permitted.
What Are The Benefits?
The major benefits of using a PAL are the low-interest rates and low fees. Federal credit unions are owned by the union members and are therefore more geared towards helping their members create a better credit rating. There are no hidden fees and loan terms can be up to six months, which is not possible with payday loans without having the initial loan rolled over.
How to Apply For A PAL?
You can apply for a PAL at many local federal credit unions. Remember that you must be a member for at least a month before a loan will be provided. Supplying a recent pay stub is typically all you need to get approved for a PAL. Many unions don’t typically consider a person’s credit score, rather they consider the borrower’s income and their ability to actually repay the loan.
Don’t Get Fooled By PAL-Like Loans
It’s important to remember that PAL loans are specifically secluded to the federal credit unions. No other state credit unions or traditional banks can offer this specific alternative loan. Although other lenders can’t offer a PAL they can offer similar types of alternative loans, but beware their fees are not capped by the regulations that PALs are.
For example, some state credit unions may offer a 0 percent interest rate on a short-term alternative loan for a 30 day period. The catch is they charge a $50 application fee. When you are borrowing a small amount, such as $200, this is the equivalent of a 300 annual percentage rate.
If there are no federal credit unions around your area, there are safe alternatives. In some states, state credit unions are required to comply with rules of the federal credit union. Although they cannot entitle their loans as true PALs, they can offer the same loan benefits. These provide a safe alternative for individuals as these state credit unions are limited in the amount of interest they can charge and the fees associated with the loan, just like the federal credit unions.
If you have partaken in payday loans which you had trouble repaying in the past, it’s likely that your credit rating has taken a hit. Credit unions can help you rebuild your credit with creative alternative loans.
For example, if you need $500 for an unexpected expense, a credit union can issue you a loan for $1,000. You will receive the $500 upfront to cover your expense and then get the remaining $500 after the loan is paid off.
Another great alternative is a credit-building loan. This is where a member takes out a loan for a specified amount. The credit union doesn’t give the member access to the funds, rather they secure the amount in a savings account. Once the loan is paid off the member is given access to the money.