Payday Alternative Loans (PALs): The Credit Union Option Capped at 28%
How federal credit union PAL I and PAL II loans work, the limits set by the NCUA, what a PAL costs compared with a payday loan and how to find a credit union that offers one.
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Key takeaways
- PALs are small-dollar loans that federal credit unions may offer under NCUA rules.
- PAL I: $200 to $1,000, 1 to 6 months, membership of at least one month. PAL II: up to $2,000, 1 to 12 months, available as soon as you join.
- Interest is capped at 28%; the application fee may not exceed $20.
- A $1,000 PAL over six months costs about $103 in interest and fees, compared with about $150 for a single two-week payday loan of the same amount.
Payday loans are easy to get and hard to escape. Federal regulators created payday alternative loans to offer the same speed and small amounts at a cost that does not trap borrowers. The product is not available everywhere, but where it is, it is often the cheapest legitimate way to borrow a few hundred dollars with imperfect credit.
Please note
Based on NCUA rules in 12 CFR 701.21 as of October 2026. Individual credit unions set their own rates and eligibility within these limits, and not every credit union offers PALs. State-chartered credit unions follow their own state rules.
PAL I vs. PAL II at a glance
| Rule | PAL I | PAL II |
|---|---|---|
| Loan amount | $200 to $1,000 | Up to $2,000 |
| Term | 1 to 6 months | 1 to 12 months |
| Membership before borrowing | At least 1 month | None required |
| Maximum interest rate | 28% | 28% |
| Application fee | Up to $20 | Up to $20 |
| Repayment | Fully amortizing, no rollovers | Fully amortizing, no rollovers |
| Frequency | One PAL at a time; no more than three in any rolling six-month period | |
The 28% cap is the federal credit union interest ceiling of 18% plus ten percentage points. The application fee must reflect the actual cost of processing the application. Because the fee counts toward the APR, a short PAL can show an APR above 28% even though the interest rate itself is within the cap.
What a PAL costs compared with a payday loan
Example
You borrow $1,000 as a six-month PAL at 28% with a $20 application fee. The payment is $180.54 a month. Interest totals $83.24, so the full cost is $103.24, an APR of about 35% once the fee is included.
A payday loan of $1,000 at a typical fee of $15 per $100 costs $150 for two weeks, an APR of about 391%. Keeping it going for six two-week periods, about three months, costs $900 in fees while the $1,000 is still owed.
The structural difference matters as much as the price: a PAL is repaid in installments over months, while a payday loan is due in full on your next payday, which is why so many borrowers renew it.
Who can get a PAL
- Members of a federal credit union that offers the program. For PAL I you must have been a member for at least a month; PAL II has no waiting period.
- Credit unions check your ability to repay, usually through income and account history rather than a high credit score. Many use direct deposit or account history as part of the decision.
- Military members and their families are additionally protected by the Military Lending Act's 36% cap on most consumer credit; see SCRA and Military Lending Act protections.
How to find and apply for a PAL
- Search for credit unions you can join through the NCUA's credit union locator or ask your employer, school or community groups.
- Ask directly whether they offer PAL I or PAL II loans. Some brand them as "small-dollar loans" or "payday alternative loans".
- Open a membership, often with a small share deposit.
- Apply with proof of income and ask for the APR, fee and payment schedule in writing.
When a PAL is not the answer
A PAL is designed for short-term gaps, not for ongoing shortfalls or debt you already struggle to pay. If you are borrowing to cover regular bills, a nonprofit credit counselor can help you build a budget or negotiate with creditors. For larger amounts or longer terms, compare regular credit union loans, which are capped at 18% at federal credit unions, in personal loans for bad credit.
Frequently asked questions
What is the maximum interest rate on a payday alternative loan?
28%, set by the NCUA. A credit union may also charge an application fee of up to $20, which raises the APR on very short loans.
How much can I borrow with a PAL?
$200 to $1,000 with a PAL I and up to $2,000 with a PAL II.
Do I need good credit for a PAL?
Usually not. Credit unions focus on your ability to repay, such as income and account history, but each credit union sets its own criteria.
Can I roll over a PAL?
No. PALs must be fully amortizing and may not be rolled over. A credit union may extend the term within the maximum without extra fees or new credit.
Do all credit unions offer PALs?
No. Only federal credit unions can offer NCUA PALs, and participation is voluntary. Some state-chartered credit unions offer similar small-dollar loans under state rules.
