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A fee you can see upfront
Fees in dollars
The fees are small and concrete: five or ten dollars to take out a loan, some processing fees on top, and on a few apps a subscription. Borrowing $1,000 for rent and stretching it over a couple of weeks might cost about $25.
Cards versus loans
A credit card is harder to read. The interest rate fluctuates, a late fee can be unspecified, and then the rate can go up. That makes the cost feel unpredictable in a way a flat fee doesn't.
The loans are also short, lasting a few weeks or a few months, which is part of the pitch that nobody can sink into a long-term debt trap with them.
Who pays
Someone has to pay for all this. There are only two places for these companies to make their money, the merchants or the consumers. Early on the merchants usually paid, but as people use the loans for everyday needs, the consumer is more often the one paying the fees.
Why do credit card rates change over time?
Most credit cards carry a variable rate tied to the prime rate, which moves with the Federal Reserve's target for short-term interest rates. When the Fed raises that target, card rates typically rise within a billing cycle or two. The Federal Reserve's own data showed average credit card rates above 20 percent in 2023 and 2024. Card issuers can also raise the rate on a borrower after a missed payment, depending on the card agreement.
Why do pay later fees look different from interest?
The Truth in Lending Act, passed in 1968, requires lenders to disclose an annual percentage rate on loans that carry a finance charge or are repayable in more than four installments. A pay-in-four loan with no finance charge has historically sat outside that definition. A flat fee, such as a few dollars to take out a loan, is easy to see but is not expressed as a yearly rate. A yearly rate is what lets a borrower compare a card with a loan lasting a few weeks.
How do merchants end up covering the cost?
Merchants pay the lender a percentage of each financed sale plus, in many cases, a small flat fee per order. That arrangement resembles the interchange fee that merchants pay on card payments, usually a few percent of each sale. Providers have generally charged merchants more than card networks do, since the lender carries the risk that the shopper never pays. When fewer purchases are optional and more are everyday needs, lenders have a stronger reason to collect from borrowers directly.
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