Last reviewed: 9 October 2026
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Credit union payday alternative loans (PALs): what the NCUA rule requires
Under 12 C.F.R. § 701.21(c)(7), a federal credit union may charge up to 1,000 basis points above the NCUA Board’s general loan rate ceiling on a “payday alternative loan” if the loan meets a list of conditions.[1] The NCUA has kept the general ceiling at 18 percent through 10 September 2027,[2] so by the rule’s formula the PAL maximum is 28 percent. This page sets out those conditions for the two versions, PALs I and PALs II. It explains the rule; it does not say whether a particular credit union offers one, or whether you should borrow.
The short version
- PALs I: a principal of $200 to $1,000, a term of one to six months, and a borrower who has been a member for at least one month.[1]
- PALs II: a principal of up to $2,000 and a term of one to 12 months. The regulation text lists no minimum membership period for PALs II.[1]
- Both: a fully amortizing loan with no rollovers, an application fee that reflects actual processing cost and never exceeds $20, and no more than three such loans to one borrower in any rolling six-month period or more than one at a time.[1]
- For comparison: the CFPB says a typical two-week payday loan with a $15 per $100 fee equates to an annual percentage rate of almost 400 percent.[3]
Who the rule covers
Section 701.21 is part of the NCUA’s regulations on loans to members, which apply to federal credit unions. It says a federal credit union generally may not charge more than 15 percent a year, and that the Board may establish a higher maximum when it determines that market interest rates have risen and prevailing rate levels threaten safety and soundness.[1] The Board has kept that higher ceiling at 18 percent, most recently extending it through 10 September 2027, and the NCUA letter announcing the extension is dated February 2026.[2] This page does not cover how state-chartered credit unions, banks or other lenders handle small-dollar loans, which follow other rules.
PALs I and PALs II side by side
| Condition | PALs I (§ 701.21(c)(7)(iii)) | PALs II (§ 701.21(c)(7)(iv)) |
|---|---|---|
| Principal | Not less than $200 or more than $1,000[1] | Not more than $2,000[1] |
| Term | Minimum one month, maximum six months[1] | Minimum one month, maximum 12 months[1] |
| Maximum rate | 1,000 basis points above the Board’s general ceiling[1] | 1,000 basis points above the Board’s general ceiling[1] |
| Membership before the loan | At least one month[1] | No minimum period listed in the regulation text[1] |
| Application fee | Reasonable, reflecting actual processing cost, never above $20[1] | Same[1] |
| Number of loans | No more than three PALs (I or II) in a rolling six-month period to one borrower, and no more than one at a time[1] | Same limit, counted across PALs I and II together[1] |
| Rollovers | None. An extension within the maximum term is allowed if it adds no fees and no new credit[1] | Same[1] |
| Repayment structure | Fully amortizing[1] | Fully amortizing[1] |
| Overdraft-service fees | Not addressed in the PALs I conditions[1] | No fee or charge, including a non-sufficient funds fee, on the borrower’s account under the credit union’s overdraft service in connection with the loan[1] |
| Credit union’s own limit | Written policy capping all PALs at 20 percent of net worth, with underwriting guidelines such as two recent pay stubs[1] | Same cap, covering PALs I and II together[1] |
The rule also requires that a PAL be closed-end credit, which Regulation Z defines as consumer credit other than open-end credit.[1][4] In practice that means a loan with a set amount, term and payment schedule rather than a revolving line.
What the maximum rate looks like in dollars
The arithmetic below is ours, using the standard amortization formula at an exact 28 percent annual rate compounded monthly. It is an illustration of the ceiling, not a quote from any credit union, and it leaves out the application fee of up to $20. Because the fee is charged on top of interest at up to 28 percent, the loan’s total cost expressed as an APR can be higher than 28 percent; the rule states the interest-rate limit and the fee cap separately and does not state a cap on a combined APR.[1]
| Loan | Monthly payment | Total interest |
|---|---|---|
| $1,000 over 6 months at 28% | $180.54 | $83.24 |
| $2,000 over 12 months at 28% | $193.01 | $316.14 |
The ceiling is a maximum. The regulation does not require a credit union to charge it.[1]
Credit reporting and other features the rule leaves optional
The regulation’s guidance sections say features that may help a PAL program succeed include a savings component, financial education, reporting members’ payments to credit bureaus, and electronic loan transactions. It describes these as guidance and best practices, not as a checklist, so whether a given credit union reports PAL payments is something to ask it.[1] For why that matters, see payday loans, explained, which covers how storefront payday lenders generally treat credit reporting.
What this page does not cover
It does not say which credit unions offer PALs, how any credit union decides who qualifies, or whether a PAL is a better fit than another option. It does not cover state-chartered credit unions. The ceiling and the rule can change, so the figures here are as of the dates in the references. For the full set of options when money is short, see debt relief options compared; for card hardship programs, see how to ask a card issuer for a hardship plan.
Your next step
The two documents that matter are the loan agreement and the Truth in Lending disclosure, which show the actual APR, the fee and the payment schedule. The conditions in the table above can be compared against them line by line. For free credit counseling, see nonprofit credit counseling and debt management plans.
When we will update this page
We revisit it when the NCUA amends section 701.21 or changes the general loan rate ceiling. The eCFR text and the NCUA letter were read on 9 October 2026.
What you can do next
- Find a company — see which specific US companies we checked and what we could verify.
- How we check — the rules and sources behind each result.
- More credit help guides
- Report an error on this page or in a result.