How Do Credit Unions Work? Membership, PALs and Cheaper Small Loans

Dana Whitfield · Financial writer, lead editor
Published Oct 1, 2026 · Updated Oct 1, 2026
Reviewed by Marcus Bell

A credit union is a not-for-profit financial cooperative owned by the people who bank with it, and that structure is why its small loans cost a fraction of a payday advance. Earnings come back to members as lower rates and thinner fees instead of shareholder profit. For a borrower facing a $500 gap, the difference is the whole decision: a $500 PAL costs about $57 in interest over three months at the 28% cap, while a 15%-per-cycle payday fee costs $225 for the same amount in six weeks.

Membership: Who Can Join and What It Costs

Every credit union serves a defined field of membership: employees of certain employers, students of a school, residents of a county, members of a congregation or relatives of current members. There are more than 4,000 federal and state credit unions, and most Americans qualify for at least one without realizing it. Joining takes a one-time share deposit, typically $5 to $25, which makes you a member-owner rather than a customer.

The Payday Alternative Loan, in Numbers

PALs are the product built specifically to undercut payday pricing:

	PAL I	PAL II
Amount	$200-$1,000	$1,000-$2,000
Term	1 to 6 months	6 to 12 months
APR ceiling	28%	28%
Application fee	Max $20	Max $20
Rollovers	Prohibited	Prohibited

A $500 PAL I over three months at 28% APR repays roughly $557 in total. The same $500 as a payday advance at 15% per cycle costs $575 in six weeks, and $725 if it rolls over twice. The PAL reports to the credit bureaus, so the payments also build credit history, which a payday advance almost never does.

How to Actually Get One

Find your eligibility. Search credit unions by county or employer; community chartered credit unions accept anyone living or working in their area.
Join with the share deposit, then ask for a PAL by name at the branch or by phone.
Bring income details. Most federal credit unions approve PALs with a soft check or an income review, so thin credit is not the barrier it is elsewhere.

If a PAL is unavailable, the next rungs stay cheaper than rollovers: the alternatives ranking orders every route by cost, and the affordability check confirms the payment fits before you sign.

Frequently asked questions

Who can join a credit union?

Each credit union serves a defined field of membership: an employer, a school, a church, a geographic community or a family member already inside. Most people qualify for several without knowing it, and joining usually requires a one-time share deposit of $5 to $25.

What is a Payday Alternative Loan?

A PAL is a small-dollar loan regulated by the NCUA and offered by federal credit unions: $200 to $2,000, repaid over one to twelve months, at an APR ceiling of 28%. Applications cost at most $20, and rollovers are prohibited.

Do credit unions check credit?

For a PAL, most federal credit unions run a soft check or review income directly, and many approve borrowers the bureaus would score poorly. For larger products like car loans or credit cards, a hard check is standard.

How is a credit union different from a bank?

A credit union is a not-for-profit cooperative owned by its members, so earnings return as lower rates and fewer fees rather than shareholder profit. Banks are for-profit and typically price small-dollar credit higher.