New York Department of State’s Division of Consumer Protection Warns Consumers to Avoid Financial Traps When Considering Short-Term Borrowing Options

 

Short-Term Borrowing Options May Be Appealing, But They Could Lead to Long-Term Financial Consequences

More Than 26% Increase in Short-Term Borrowing Over One Year, Signaling Increased Stress on Household Budgets

Secretary Mosley: “If you find yourself using buy now and pay later options to cover your essentials on a consistent basis, it’s important to understand the impact this type of borrowing can have on your financial health.”

The New York Department of State’s Division of Consumer Protection is warning consumers to avoid financial traps when considering short-term borrowing options to purchase goods or cover essential expenses during a financial hardship. While consumers search for ways to bridge the gap between income and expenses, it is important to understand the potential drawbacks of relying on short-term borrowing options to cover basic necessities. Regularly using these services can lead to financial traps like missed payment penalties, hidden fees, high interest rates and cycles of debt that can have long-term consequences.

“If you find yourself using buy now and pay later options to cover your essentials on a consistent basis, it’s important to understand the impact this type of borrowing can have on your financial health,” said Secretary of State Walter T. Mosley. “Short-term borrowing can offer a quick solution in a financial pinch, but what seems like a temporary fix can become a long-term burden when these products are used repeatedly. New Yorkers should know the true cost before they borrow and take on additional debt.”

WHAT YOU NEED TO KNOW ABOUT SHORT-TERM BORROWING OPTIONS

Short-term borrowing options can be helpful if used for a one-time emergency with a clear repayment plan. They can be a financial bridge when other options are not available, and are generally intended for short-term use. While these options offer fast access to funding, they require careful navigation to avoid debt traps. According to Experian, some consumers are shifting to short-term options to bridge the gap between paychecks. The number of returning borrowers increased 26.5% in one year, signaling an increasing reliance on these types of products. 

Frequent reliance on forms of credit such as cash advances, buy now/pay later options, preapproved “live check” offers (which offer quick cash but may actually be long-term/high interest loans) or payday loans is a sign that a budget is already under stress, and using these products regularly to cover basic necessities may make your financial situation worse in the long run. It is important to have a clear plan to pay for these products in full and compare the true cost. Relying on these products to cover basic necessities can lead to a financial trap if you miss a payment or stack multiple plans. If you’re consistently short on basics, there are better options to check first, including financial and food assistance that may be available through state or local programs.

The Division of Consumer Protection highlights the following tips to keep in mind when considering short-term borrowing options and related financial services:

• Review the fine print. When exploring lenders, don’t skip the fine print in the terms and conditions. For instance, cashing a live check offer means you have automatically accepted the terms of that offer and are locked into an agreement. Interest charges start the moment the bank clears or cashes the check. It’s crucial to read all the details and look out for potential fees, interest rates and repayment terms associated with financial services, especially those relating to late or missed payments.
   
• Avoid overspending. Short-term borrowing options such as buy now, pay later (BNPL) platforms may seem enticing and offer a seemingly-affordable option to consumers – but they may psychologically blur the true cost of goods and lead to overspending. According to a recent report by the Consumer Financial Protection Bureau, 20% of borrowers can be characterized as heavy users, originating more than one BNPL loan on average per month in 2022. Avoid taking multiple loans at the same time and read more about the risks of BNPL financing here.
  
  
• Avoid multiple loans and monitor your accounts. Multiple short-term loans can lead to juggling multiple overlapping payments. Before you know it, due dates can start accumulating, triggering late fees and penalties which can increase the cost of loans and may lead to perpetual debt cycles. 
   
• Be aware of limited protections. Short-term borrowing options may not offer the same protections as traditional credit cards when it comes to disputing charges, returning items, or addressing fraud. Without guaranteed consumer protection policies in place, shoppers are more vulnerable to financial harm. These types of alternative financial services may also not come with the option to build credit nor gain rewards or benefits that are offered by traditional payment methods.
   
• Review your budget. While we all love a good deal, avoid impulse shopping. Aim to stay within your budget, keep track of payment due dates and be mindful of wants versus needs. 
   
• Do the research. Before using short-term borrowing options, research the lending company for complaints about late fees, hidden charges, or return issues. This could give a good indication of what you may be getting yourself into before making purchases, and help you understand the risks and avoid potential financial hurdles and complications. It’s also advisable to shop around and compare lenders to ensure you are choosing the best offer that works for you. 
  
  
• Check local resources. If you’re consistently short on basic supplies and going through a financial hardship, local assistance may be available through food pantries, utility payment plans or energy assistance programs. There are several key public programs and resources that are available to eligible New Yorkers to help cover essential needs. Check out NYS social programs and Community Action Agencies for assistance if you qualify. 

While short-term borrowing option and financial services may seem quick and convenient, they also come with risks and hidden costs. With diligent research and careful consideration of the terms of agreements, consumers can make wise financial decisions that work best for them and their wallets.

About the New York State Division of Consumer Protection

Follow the New York Department of State on Facebook, X and Instagram and check in every Tuesday for more practical tips that educate and empower New York consumers on a variety of topics. Sign up to receive consumer alerts directly to your email or phone here.

The New York State Division of Consumer Protection provides voluntary mediation between a consumer and a business when a consumer has been unsuccessful at reaching a resolution on their own. The Consumer Assistance Helpline 1-800-697-1220 is available Monday to Friday from 8:30am to 4:30pm, excluding State Holidays, and consumer complaints can be filed at any time at www.dos.ny.gov/consumer-protection. The Division can also be reached via X at @NYSConsumer or Facebook.