Monday, October 31, 2011

Layaway: Good, Bad or In Between?

With the holiday season quickly approaching, I’ve noticed some major retailers advertising the return of their Layaway programs. These programs work by allowing a customer to make a small down payment on items they want to buy, and make a series of payments over the course of a few weeks to finish paying for the items. In return, the retailer will guarantee that the item is in stock when it comes time for the customer to pick it up after the last payment is made. There is a service fee associated with layaway, and a customer may be faced with cancellation fees if they miss payments or decide to cancel the layaway plan. However, from looking at both the Walmart and Kmart layaway plans, service fees generally are between $5-10, and customers can get a refund if they decide to cancel the layaway.

I’ve never used layaway before and I’m not planning to use it in the future, but I am curious to know if it is a truly a benefit for shoppers. I can think of a few “pros” for using layaway:

  • Low, upfront fees. As long as a customer makes their payments, they can get their items with as little as $5 in fees. Compared to using a credit card, this may be a better deal if you have a high interest rate, purchase a large amount of merchandise, and stretch out your credit card payments.
  • You can’t sink yourself into a debt pit. With credit, a customer gets an item upfront and can pay for it over an indefinite period of time. The longer it takes to pay for an item purchased on credit, the more money is owed. With layaway, there is an agreed upon time limit for payments; if these payments are not met, the customer loses out on the items and may incur cancellation fees. The nature of the layaway system basically creates a debt limit, as the most that you are required to pay is the cost of the items and the initial service fees.
  • Layaway does not affect credit score. Layaway is essentially the opposite of credit, so it doesn't affect your credit score. For this reason, it is a better option than getting a store credit card to make holiday purchases.
  • Provides help for those living “paycheck-to-paycheck.” Let’s face it, some people have very little money at the end of each month to pay for a major purchase at one time. Layaway provides an opportunity to make purchase with little money down, and make steady payments with each upcoming paycheck. 

As with anything, there is also a downside to using layaway. Here are a few “cons” to consider:

  • The fees aren't that low.  When you consider the percentage of the total purchase price that is going towards service fees instead of the dollar amount of the fees, the fees really aren't that low.  Walmart requires that a layaway purchase must be at least $50 and you must pay a $5 service charge and put down a 10% down payment.  Cornell University professor Louis Hyman shows an example of this when considering a mother who purchases $100 on layaway at Walmart, paying the $5 service fees and paying a $10 down payment.  In paying off the remaining $90 balance over the next 2 months,  "in effect, she is paying $5 in interest for a $90 loan for two months: the equivalent of a credit card with a 44 percent annual percentage rate, a level most of us would consider predatory." For a customer buying only $50 in merchandise, the equivalent credit card annual percentage rate would be even higher!
  • The hassle of making payments. When a customer uses layaway, they enter into a contract with a number of required payments in a fairly short (8-12 week) time period. It may be easier for some customers to miss a payment, as it is not on the standard monthly payment that we are used to. Also, payments must be made in person at the retail store, so that means more frequent trips to the store and more temptation to buy additional items. 
  • The risk of ending up empty handed. If something happens and a customer misses payments, they will not receive the layaway items. This means that they would have paid the upfront service fees and the initial down payment, and end up with nothing to show for it. 
  • The risk of over spending. With low down payments and not having to haul around heavy shopping bags, there is a temptation to buy more than you would if you had to pay full price upfront. 

I try to avoid fees like the plague so, as I said, I’m not planning to use layaway. I guess I can say that layaway isn’t the worst option when it comes to making purchases, but for now, I’ll stick with saving money little by little to buy what I want!

Have you ever tried layaway? Planning to use it this holiday season? Feel free to share in the comments!

1 comment:

  1. Good article, layaway does provide some pros depending on the item(s) selected. However, you could also miss out on that great Xbox deal (including two free games) at the same price by choosing the layaway plan. I think its good to watch the market for deals and plan to save an extra month ahead to catch the better deals when the time is right. Timing is everything.


Leave your two cents