A payday alternative loan (PAL) is a small loan from a federal credit union, made under a National Credit Union Administration (NCUA) rule that currently caps the interest rate at 28% and the application fee at $20 (12 CFR 701.21). At those maximums, borrowing $500 for one month costs up to $31.67, while the same $500 as a payday loan in South Carolina comes with a fee of up to $75 (SC Code 34-39-180). Two conditions come with it: you have to be a member of the credit union, and a federal credit union may offer PALs but is not required to.
How a PAL works
A PAL is a closed-end loan: you borrow a fixed amount once and repay it on a set schedule. Federal credit unions make these loans under 12 CFR 701.21(c)(7), which sets the amounts, terms and maximum charges. The rule was written to give members a cheaper option for the same kind of short cash gap that sends people to a payday lender: a car repair, a medical bill, rent that comes due before the paycheck.
The structure is what sets a PAL apart from payday loans. A payday loan is usually repaid in one payment on your next payday. A PAL is repaid in equal installments, it cannot be rolled over for another fee, and its price is a capped interest rate plus a capped application fee rather than a flat fee per $100 borrowed.
A federal credit union is allowed to offer payday alternative loans, but it is not required to. If it does, it can set its rate and fee below the federal maximums and use its own approval standards. Ask the specific credit union whether it offers PALs and on what terms before you count on one.
PAL I vs PAL II: side-by-side
The NCUA rule at 12 CFR 701.21(c)(7) sets two versions of the payday alternative loan. Both are closed-end loans from a federal credit union.
| Term | PAL I | PAL II |
|---|---|---|
| Loan amount | $200 to $1,000 | Up to $2,000 (no minimum amount) |
| Loan term | 1 to 6 months | 1 to 12 months |
| Membership | Member of the credit union for at least one month before the loan | You must still be a member, but there is no one-month waiting period |
| Application fee | Up to $20 (reasonable, actual processing cost) | Up to $20 (reasonable, actual processing cost) |
| Interest rate | Up to 28% | Up to 28% |
| Overdraft and NSF fees | No separate ban in this part of the rule | Credit union cannot charge overdraft or NSF fees in connection with the loan |
Source: 12 CFR 701.21, eCFR, as of October 2026. The limits are maximums. A credit union may charge less.
Rules that apply to both PAL I and PAL II:
- The loan must fully amortize: you repay in equal installments, with no lump sum at the end.
- A credit union can make you only one PAL at a time and no more than three (PAL I and PAL II together) in any rolling six-month period.
- Rollovers are not allowed. A credit union may extend the term within the maximum term, with no extra fee and without lending you more.
- You can repay early without a penalty. This rule covers every federal credit union loan (701.21(c)(6)).
Where the 28% comes from
The 28% is the interest rate. It does not include the application fee, so it is not an all-in annual percentage rate. The rule’s base ceiling for federal credit union loans is 15%. The NCUA Board has set a temporary 18% ceiling and, in February 2026, extended it through September 10, 2027 (NCUA Letter 26-FCU-02). The same letter says a credit union may still charge up to 28% on payday alternative loans under the rule’s terms. What happens to the ceilings after that date has not been announced.
Recent rule changes
The PAL rules themselves have not changed since the PAL II final rule took effect on December 2, 2019 (84 FR 51942). What has moved since then is the general rate ceiling behind the 28%, most recently extended in February 2026. The eCFR text as of October 2026 still reflects the 2019 rule.
PAL vs payday loan: cost on $500
The example uses a $500 loan and the maximum charges on both sides. Real offers can be cheaper: 28% and $20 are caps, not the price of every credit union, so your cost may be lower.
The payday figures are for South Carolina, where a payday loan can be up to $550 for up to 31 days, with a fee of up to 15% of the amount borrowed (SC Code 34-39-180, South Carolina Code, Title 34, Chapter 39). The state regulator for these lenders is the State Board of Financial Institutions, Consumer Finance Division (SC Code 34-39-120 and 34-39-175). Rollovers are not allowed. Other states have different rules.
| Loan | Term | Interest or fee, $ (up to) | Total repaid, $ (up to) |
|---|---|---|---|
| Payday loan, South Carolina | Up to 31 days (one payment) | 75.00 fee (15% of $500) | 575.00 |
| PAL, 1 month | 1 month (one payment) | 11.67 interest + 20.00 application fee = 31.67 | 531.67 |
| PAL, 6 months | 6 months (6 equal payments of 90.27) | 41.62 interest + 20.00 application fee = 61.62 | 561.62 |
Figures as of October 2026 for PAL and September 2026 for the South Carolina payday rules. The $20 application fee may be charged at closing, so the cash you receive can be lower than $500. A South Carolina lender may also pass on up to $0.50 of the state database fee (SC Code 34-39-270(H)) on top of the payday total. Treat the totals as upper limits.
How the numbers were calculated:
- Payday: $500 x 15% = $75, so you repay $575.
- PAL for 1 month: $500 x 28% / 12 = $11.67 interest. With the full $20 fee that is $31.67, so you repay up to $531.67. In this example the PAL costs about $43 less than the South Carolina payday loan.
- PAL for 6 months: monthly interest rate is 28% / 12, balance reduces with each payment. The payment is about $90.27 a month, total interest about $41.62, and with the $20 fee the cost is up to $61.62.
The 6-month PAL costs more in dollars than the 1-month PAL because you hold the money longer, but you repay in six smaller payments instead of one lump sum.
What the numbers do not show
South Carolina is one state. According to the CFPB, many state laws set a maximum payday loan fee ranging from $10 to $30 for every $100 borrowed, and a typical two-week payday loan with a $15 per $100 fee equates to an APR of almost 400%. Payday loans aren’t available in every state. Whatever you compare, look at the dollar amounts in the loan agreement: the interest, the fee and the total you repay.
Who can get a PAL and how to join a credit union
Only members of the credit union can borrow, so getting a PAL is really two steps: joining, then applying. In order:
- Check that the credit union is federal and offers PALs. The NCUA rule covers federal credit unions. Ask whether the credit union has a federal charter and whether it makes PAL I, PAL II or both.
- Check whether you are eligible to join. Every credit union has a field of membership: the group of people it can serve. It is often tied to an employer, the area where you live or work, a school, a church or an association. Some credit unions also accept family members of existing members.
- Join. Membership usually means opening an account, often a savings account. Ask what the opening deposit and any account fees are.
- Mind the waiting period. For a PAL I, you need at least one month of membership before you get the loan. For a PAL II, there is no one-month waiting period.
- Apply. The credit union reviews the application under its own standards and decides whether to lend and on what terms.
The NCUA rule expects the credit union to apply appropriate underwriting guidelines and gives proof of employment, such as at least two recent pay stubs, as an example of what it can check. That is an example, not a fixed checklist, so your credit union may ask for something different. The rule itself does not say anything about credit history; each credit union decides how it weighs it.
When a PAL may not work for you
A PAL is cheaper on paper than a payday loan, but it does not fit every situation:
- There is no credit union you can join, or the ones you qualify for do not offer PALs.
- You need the money this week and only PAL I is available. If you are not a member yet, the one-month membership requirement means a PAL I cannot cover an immediate bill.
- The credit union declines the application under its own underwriting standards.
- You need more than the limit. PAL I stops at $1,000 and PAL II at $2,000.
- That credit union has already lent you a PAL. It can make you only one PAL at a time and no more than three in any rolling six-month period.
If one of these applies, there are still a few things to try:
- Ask another credit union you are eligible for. Terms and approval standards differ from one to the next.
- Ask the company you owe for more time. Landlords, utilities and medical offices sometimes agree to a later date or a payment plan if you ask before the bill is due.
- If you are still considering a payday loan, read your state’s rules first: whether payday lending is allowed, the maximum fee and whether rollovers are permitted.
If you fall behind, the credit union usually collects the PAL itself as the original lender. If the debt is later handed to a debt collector, federal rules on how collectors can contact you apply (CFPB).
The NCUA rule caps the interest rate and the application fee, but it does not set a limit on late fees. A missed payment can cost you money and can show up on your credit report if the credit union reports to the bureaus. Read the late payment terms in your loan agreement before you sign, and call the credit union before a due date you know you will miss.
How to find a credit union that offers PALs
No single list shows which credit unions offer PALs today, so the practical route is to start with credit unions you can already join and ask them.
- Start close to home. Look at credit unions linked to your employer, your area, your school or an association you belong to. Their field of membership is most likely to include you.
- Use the regulator’s sites. The National Credit Union Administration regulates federal credit unions. Its consumer site has a page on payday alternative loans. Two caveats: it describes PAL I terms only, so use the table above for PAL II, and it calls the 28% an APR. In the rule, 28% is the interest rate cap, and the application fee is charged on top, which is why this article treats them separately.
- Check the credit union’s website or call a branch. Some credit unions list PALs under small-dollar or short-term loans; others use their own product name.
Questions to ask before you join or apply:
- Do you offer PAL I, PAL II or both?
- What interest rate and application fee do you charge on them?
- How long do I need to be a member before I can apply?
- What do you check when reviewing an application?
- Do you report PAL payments to the credit bureaus?
- What are the late payment terms?
- How long does it usually take from approval to the money reaching my account?
Payday alternative loans FAQ
A payday alternative loan is a small, closed-end loan from a federal credit union, made under the NCUA rule 12 CFR 701.21(c)(7). You repay it in equal installments over 1 to 6 months (PAL I) or 1 to 12 months (PAL II). The interest rate can be up to 28%, the application fee up to $20, and rollovers are not allowed.
PAL I is for $200 to $1,000 over 1 to 6 months, after at least one month of membership. PAL II goes up to $2,000 with no minimum amount, runs 1 to 12 months, has no one-month waiting period and bars overdraft or NSF fees in connection with the loan. Both cap the interest rate at 28% and the application fee at $20.
At the maximum charges, a $500 PAL repaid in one month costs up to $31.67 ($11.67 interest plus a $20 application fee), so you repay up to $531.67. A $500 payday loan in South Carolina costs up to $75, so you repay $575. Over 6 months, the same PAL means 6 payments of about $90.27, about $41.62 in interest and up to $61.62 with the fee.
Yes, for both types. A PAL I requires at least one month of membership before the loan; a PAL II has no waiting period. To join, you need to fit the credit union’s field of membership, which is often based on your employer, where you live or an association.
It depends on the credit union. The NCUA rule expects each credit union to apply its own underwriting guidelines and gives proof of employment, such as at least two recent pay stubs, as an example. The rule itself does not say anything about credit history; each credit union decides how it weighs it. Ask what it looks at before you apply.
No. The rule applies to federal credit unions and allows them to offer PALs without requiring it. Terms differ among those that do, and so does whether you can apply online, so check the website or call before you join.
No. Rollovers are not allowed for PAL I or PAL II. A credit union may extend the term within the maximum term, without an extra fee and without lending you more. A credit union can make you only one PAL at a time and no more than three in any rolling six-month period.
Only if the credit union reports your payments to the credit bureaus, and not every credit union does. Ask the credit union whether it reports PAL payments before you borrow. Payday loans, by contrast, are generally not reported to the three nationwide credit bureaus, according to the CFPB.
If you have looked at credit union options and a short-term loan from a lender still fits your situation, you can compare payday loan options available in your state on MaybeLoan. Availability depends on your state.
- 12 CFR 701.21, Loans to members and lines of credit to members (eCFR)ecfr.gov
- NCUA Letter to Federal Credit Unions 26-FCU-02, Permissible Loan Interest Rate Ceiling Extendedncua.gov
- NCUA press release, February 6, 2026: NCUA Board Extends Loan Interest Rate Ceilingncua.gov
- Federal Register, 84 FR 51942, Payday Alternative Loans (final rule)federalregister.gov
- South Carolina Code, Title 34, Chapter 39 (Deferred Presentment Services)scstatehouse.gov
- CFPB: What is a payday loan?consumerfinance.gov
- CFPB: Can taking out a payday loan help rebuild my credit?consumerfinance.gov
- CFPB: What laws limit what debt collectors can say or do?consumerfinance.gov
