A Payday Alternative Loan (PAL) is a small-dollar loan offered by federal credit unions under rules set by the National Credit Union Administration (NCUA). It is designed to replace payday loans, with the interest rate capped at 28% APR and the application fee capped at $20. There are two versions: PAL I ($200–$1,000) and PAL II (up to $2,000).

Alternatives · Credit Unions

PALs: The Credit-Union Loan Almost Nobody Knows About

Maria Keller · Consumer credit analyst ✓ Fact-checked Updated June 12, 2026 · 8 min read

The exterior of a small local credit union branch in late afternoon light

⚡ Key takeaways

A Payday Alternative Loan (PAL) is a federal credit-union loan built specifically to replace payday loans — capped at a 28% APR.
PAL I: $200–$1,000, 1–6 month term. PAL II: up to $2,000, up to 12 months. Application fee capped at $20.
A $500 PAL can cost well under half what the same payday loan would — and there's no balloon payment or rollover.
You must be a credit-union member; many you can join in minutes with a small deposit, regardless of where you work.
Credit unions are flexible on credit score, so PALs are realistic even with bad credit.

There's a small-dollar loan that does almost everything a payday loan does — covers a few hundred dollars, works with bad credit, funds quickly — except it caps your cost at a 28% APR instead of nearly 400%. It's called a Payday Alternative Loan, or PAL, and it's offered by federal credit unions under rules written by the National Credit Union Administration. Most borrowers have never heard of it, largely because credit unions don't advertise the way storefront lenders do.

That obscurity is the only real downside. On every other measure — cost, structure, protection from the rollover trap — a PAL beats a payday loan handily. Here's exactly how the two versions work, what they cost, who qualifies, and how to get one even if you're not currently a credit-union member.

What a PAL actually is

The NCUA created PALs as a regulated, lower-cost substitute for payday loans. Because the rules are federal, the core protections are the same at every participating credit union: the interest rate can't exceed 28% APR, the application fee can't exceed $20, and the loan must be a fully amortizing installment loan — meaning you pay it off in equal scheduled payments, never as a single balloon. There's no rollover mechanism, which removes the exact feature that makes payday loans spiral.

PAL I vs PAL II

There are two flavors, and a credit union may offer one or both:

Feature	PAL I	PAL II
Loan amount	$200–$1,000	up to $2,000
Term	1–6 months	1–12 months
APR cap	28%	28%
Application fee	up to $20	up to $20
Membership required	~1 month	immediately
Loans at once	No more than 3 PALs in any rolling 6-month period

The practical difference: PAL II lets you borrow more and apply as soon as you join, which makes it the better fit for a brand-new member with a larger need. PAL I is the smaller, slightly more seasoned product. Both share the 28% cap and the $20 fee ceiling.

PAL vs a payday loan, in dollars

Here's the comparison that matters, using the same $500 most people would borrow:

	$500 PAL	$500 payday loan
Structure	Installments	Single balloon
Term	~3 months	~14 days
Rate / fee	28% APR + $20	$15 per $100
Total cost*	≈$40–$45	$75 (one term)
Cost if rolled 1×	n/a — no rollover	$150
Effective APR	≤28%	≈391%

*Illustrative. PAL total includes the $20 application fee plus interest at 28% over roughly three monthly payments; exact cost depends on term and credit union. The payday figure is one 14-day term repaid on time — its cost doubles with a single rollover, while a PAL has no rollover by design.

Same $500, same kind of borrower — one path caps your cost near $45, the other starts at $75 and climbs every time you can't pay. The only thing the payday lender does better is advertise.

Who qualifies — and the credit-score reality

The one hard requirement is membership: you must belong to a federal credit union that offers PALs. Beyond that, credit unions underwrite on ability to repay and look far more kindly on a thin or damaged credit file than a bank would. Many don't require a minimum score at all for a PAL; they want to see steady income and that the payment fits your budget. That makes a PAL one of the most realistic small loans for bad-credit borrowers. For PAL I you'll usually need to have been a member for about a month; PAL II is often available right after you join.

How to join a credit union (it's easier than you think)

The membership barrier is mostly a myth now. While some credit unions are tied to an employer or region, many are open to almost anyone — often through a small one-time donation to an associated nonprofit, or simply by living in a broad geographic area. The steps:

Find a credit union that offers PALs. Search the NCUA's credit union locator, or ask local ones directly whether they offer Payday Alternative Loans.
Check the field of membership. Look for one you qualify for by where you live, work, worship, or via an associational route.
Open a share (savings) account — often just a $5–$25 deposit, which becomes your membership stake.
Apply for the PAL. With PAL II you can frequently apply the same day; with PAL I you may need to wait out the short membership window.

Plan a step ahead. Because a PAL requires membership, it's worth joining a credit union before you're in a crunch, so the option is ready when you need it. If you need cash today and aren't a member yet, a PAL may be too slow — see our full payday loan alternatives guide and Responsible Lending resources for faster low-cost options.

The catch (such as it is)

PALs aren't perfect. You're limited to no more than three in a rolling six-month period, so they're not a renewable line of credit. Funding can take a day or more rather than minutes. And not every credit union offers them — you may have to call around. But none of these is a cost problem; they're access and convenience trade-offs in exchange for paying a quarter of what a payday loan charges. For most borrowers, that's a trade worth making.

The bottom line

A Payday Alternative Loan is the closest thing to a payday loan's twin that won't trap you: same small amounts, same tolerance for imperfect credit, but a 28% APR cap, a $20 fee ceiling, an installment structure, and no rollover. The only catch is that you have to be a credit-union member and seek it out — which is exactly why so few people use it. If you ever expect to need a few hundred dollars in a hurry, joining a PAL-offering credit union now is one of the highest-return financial moves available. Compare it against your other choices in our alternatives guide.

Frequently asked questions

What is a PAL loan?

A Payday Alternative Loan is a small-dollar loan from a federal credit union, governed by NCUA rules and designed to replace payday loans. The rate is capped at 28% APR and the application fee at $20. PAL I covers $200–$1,000; PAL II goes up to $2,000.

How much cheaper is a PAL than a payday loan?

Dramatically. A $500 payday loan for two weeks can cost $75 or more (about 391% APR). A $500 PAL repaid over a few months at 28% with a $20 fee costs roughly $40–$45 total — often less than half — with no balloon payment and no rollover.

How do I qualify for a PAL loan?

You must be a member of a federal credit union that offers PALs. PAL I usually requires about one month of membership; PAL II can be available immediately. Credit unions check ability to repay but are flexible on credit score, making PALs accessible even with bad credit.

Sources

National Credit Union Administration (NCUA) — Payday Alternative Loan (PAL I and PAL II) rules, 28% APR cap and $20 fee cap, ncua.gov
Consumer Financial Protection Bureau (CFPB) — guidance on credit-union small-dollar lending, consumerfinance.gov
NCUA Credit Union Locator — finding a federal credit union and its field of membership

Written by Maria Keller, consumer credit analyst. Reviewed and updated June 12, 2026. This article is educational and not financial advice; PAL terms vary by credit union — confirm details with the lender.