Payday alternative loans (PALs): the rules, the cost and your credit

PAL I and PAL II, side by side

Payday alternative loans (PALs) are small loans that only federal credit unions can make, under NCUA's lending rule at 12 CFR 701.21(c)(7). There are two versions.

Every PAL must be fully amortizing, meaning each payment covers interest and some principal, so the balance reaches zero on schedule. That's the opposite of a single-payment payday loan that comes due all at once.

PAL II adds one more protection. The credit union can't charge an overdraft or non-sufficient funds fee on your account in connection with the loan.

Where the 28% comes from

NCUA's rule caps federal credit union loans at 15% a year unless the NCUA Board sets a higher temporary rate. The Board has kept that rate at 18%, and in February 2026 it extended the 18% ceiling to September 10, 2027.

PALs get extra room. The rule allows an interest rate "1000 basis points above the maximum interest rate" the Board sets. A basis point is one hundredth of a percentage point, so 1,000 basis points is 10 points. With the ceiling at 18%, the PAL cap is 28%. If the Board ever let the ceiling fall back to 15%, the PAL cap would be 25%.

The application fee of up to $20 is separate from the interest rate, so add it in when you compare total costs.

Do PALs show up on your credit report?

Only if your credit union reports them. NCUA's rule doesn't require it. It lists "reporting of members' payment of payday alternative loans to credit bureaus" among features a credit union should consider because they can help a PAL program succeed. Experian puts it the same way from the other side: "Some credit unions report PAL payments to the credit bureaus."

When a PAL is reported, it appears as an installment account, the same type as a car loan or personal loan. Six months of on-time payments add positive payment history. A late payment adds a negative mark, just as it would on any loan.

Before you borrow, ask two questions: does the credit union report PAL payments, and to which of Equifax, Experian and TransUnion. A loan reported to one bureau only shows up in scores built from that bureau's file. If building credit is the main goal, compare a PAL with a credit builder loan, which exists specifically to create a payment record.

Payday loans and your credit report

According to the CFPB, "Payday loans are generally not reported to the three major national credit reporting companies," and most storefront payday lenders "don't report any information about your payday loan history." So paying one on time usually adds nothing to the reports your FICO and VantageScore scores are built from.

Missing payments can still reach your report. If the lender "sends or sells your payday loan debt to a debt collector," the CFPB says, the collector could report it to a nationwide bureau, and "debts in collection could hurt your credit scores." How collections affect your score explains what that does and how long it stays.

There's also a second tier of files. The CFPB's list of consumer reporting companies includes a category it calls "low-income and subprime," made up of companies that supply data to lenders serving "credit applicants with impaired credit records." DataX is one listed there. Those files sit outside the three nationwide bureaus, and you have the right to request them. Specialty consumer reports covers how.

What a $500 loan costs each way

Example: you need $500. The payday loan charges $15 per $100, the fee the CFPB uses in its typical example. Many state laws cap payday fees somewhere between $10 and $30 per $100. The PAL II charges the maximum 28% and the full $20 fee, repaid over six months.

The payday loan looks close if you repay it on the first due date. The trouble starts when you can't. In states that allow renewals, paying only the fee to push the loan out two more weeks costs another $75 each time. Five renewals plus the original term is $450 in fees over 12 weeks, and you still owe the $500.

The PAL II can't roll over, and each payment shrinks the balance. A credit union can also charge less than the 28% maximum, so ask for its actual rate.

Do you need good credit for a PAL?

NCUA's rules set no minimum credit score for a PAL. Experian says NCUA underwriting guidelines "don't outline a minimum credit score needed to get approved for a PAL," and "in some cases, no credit check may be performed at all." The rule instead points credit unions toward checking income, such as at least two recent pay stubs.

So a low score or a thin file doesn't rule you out. Membership is the gate. PAL I needs a month of membership first. PAL II doesn't, so you may be able to apply soon after you join. Credit score for credit union loans covers the ways to qualify for membership and how credit unions approve their larger loans.

How to get a PAL, step by step

1. Find a federal credit union you can join. Look at your employer, where you live and family members' credit unions. PALs are a federal credit union product.
2. Ask whether it offers PAL I, PAL II or both, and what rate and fee it actually charges.
3. Ask how it reports. Get a clear answer on whether PAL payments go to all three bureaus.
4. Bring proof of income. Recent pay stubs speed things up.
5. Pick the shortest term you can afford. Less time means less interest, and the payment still has to fit next month's budget.
6. Set up automatic payments from your share or checking account so each on-time payment gets reported, if the credit union reports.
7. Once it's paid off, keep building. A 12-month rebuild plan maps the next moves for a low score.