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Sunday, December 04, 2022

An Alternative to Payday Loans: What Сould It be?

Are you looking for financial assistance? Do you want to find a decent alternative to payday lending? Payday alternative loans are issued by some credit unions to give consumers more time to repay and a cheaper solution tailored to their needs. 

You may take out a PAL at some federal credit unions and obtain a certain sum at a lower cost compared to traditional payday loans. It helps borrowers avoid the debt trap. Here is what you need to consider.

What Is a Payday Alternative Loan?

A payday alternative loan is a short-term lending option offered by federal credit unions. This is a cheaper alternative to expensive payday loans for consumers who request additional financial assistance on short notice. 

The National Credit Union Administration (NCUA) is the organization that is responsible for setting guidelines for the terms and costs of PALs. 

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Link: https://research.stlouisfed.org/publications/page1-econ/2019/04/10/fast-cash-and-payday-loans

Currently, the interest rate is capped at 28%. An application fee can also be charged by credit unions. However, this fee should be affordable and only cover the actual cost of loan processing.

Some borrowers seek bad credit personal loans guaranteed approval direct lenders aren’t willing to issue such loans though as poor credit holders can’t prove their creditworthiness and present higher risks of default. So, qualifying for alternative lending options may be beneficial and bring approval.

Types of PALs

There are two types of payday alternative loans. Their requirements and terms differ a bit. Here are the main features of these types:

  • PAL I: The borrower may request from $200 to $1,000. The repayment term may be from one to six months. The application criteria demand potential borrowers to have been members of a certain credit union for at least a month before their loan request.
  • PAL II: The borrower may request up to $2,000. The repayment term may be from one to 12 months. There is no demand to have been a member of this credit union for a month before you apply. As soon as you join a particular credit union as a member, you may qualify for a PAL II.

How to Qualify for a Payday Alternative Loan

Many federal credit unions that offer payday alternative loans don’t have strict eligibility criteria and accept even low-credit borrowers. Although typical credit unions and local banks usually require consumers to have an excellent credit rating, this lending option offers more flexibility. 

Your income and ability to pay off the debt are more important to federal credit unions. Be ready to provide proof of your regular income if you decide to apply. Besides, keep in mind that not every credit union offers such services to borrowers.

Call a particular credit union or visit their website to check this information. It’s also a great way to ask about the eligibility criteria to become a member. 

Some not-for-profit credit unions may extend your membership based on what religious organization you belong to, where you live, your military service, your recruiter, and other factors. 

The one-time membership fee may be about $5. Consumers should make an initial deposit to fund their accounts.

The NCUA Board is proposing to amend the NCUA’s general lending rule to provide federal credit unions with an additional option to offer payday alternative loans (PALs), according to the Federal Register

It would be an alternative option, with different terms and conditions, for FCUs to offer PALs to their members.

A Payday Alternative Loan vs. a Payday Loan

It can be really expensive to borrow money in the form of a payday loan. This is a near-term borrowing option with high-interest rates. It can be used in situations when you can’t qualify for other solutions and urgently require extra cash for a couple of weeks. 

Generally, you will need to pay $15 for every $100 borrowed. The repayment term is very short and doesn’t exceed two or three weeks. 

In other words, the applicant should repay the debt together with the interest on the next salary day. The APR is close to 400% which isn’t affordable for many people.

Furthermore, payday lending can be inconvenient. It can be challenging to pay back the loan by your next paycheck apart from other monthly bills. In case the borrower doesn’t repay the debt on time, additional charges and late penalties will apply. 

It may gradually lead borrowers to an endless debt cycle. In comparison, payday alternative loans have lower interest and are more flexible. The repayment term is longer and the monthly payments are more reasonable.

Other Credit Union Small-Dollar Loans

Both state and federal credit unions have other lending options and tools to help their members avoid expensive payday loans and boost their finances. Some of these options include:

  • Credit-builder loans. These borrowing tools improve the credit score of the applicants allowing them to be eligible for cheaper loans in the future. This loan is issued by the credit union, while the funds are held in a savings account until the loan is repaid in full.
  • Dedicated purpose loans. These borrowing options are meant to cover big-ticket purchases and other one-time expenses. For instance, you may obtain from $680 to $1,000 from Self-Help Federal Credit Union to help you cover the cost of a citizenship application at 17.7% APR for up to 36 months.

Other Options to Increase Your Finances

Surprise costs and unforeseen bills may easily throw you off track even if you know how to budget. Here are other options to make ends meet and boost your finances:

  • Rework your budget. Lower spending to maximize your savings.
  • Request a payment plan. Rather than borrowing to pay a bill, you may want to negotiate a payment arrangement or extension.
  • Increase your income. You may find a side hustle to boost your current income.
  • Shop around for personal loans. If you require a large sum and your credit score is in good standing, you may request a personal loan. Local banks, credit unions, and online lenders issue such loans at reasonable rates.

The Bottom Line

 A payday loan is quite expensive. If you have already tried this lending option and seek a cheaper alternative, getting a payday alternative loan from a federal credit union is a smart solution. 

Gather information about your local credit unions that offer such tools to consumers and make sure you are a member of a certain credit union to qualify for this loan.

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