“Layaway is back!” the headlines are telling us. Numerous retailers are promoting layaway for cash-strapped holiday shoppers in the hopes of boosting sales. Almost every major retailer offers layaway: Sears, Kmart, Walmart, Toys”R”Us and many more. And although it may sound like I am knocking layaway, I do understand how important non-credit options may be for families who are really struggling this year. Still, it’s only fair to warn that if you use layaway you may:
Miss the best deals. While you’re paying on your item on layaway, you may miss opportunities to buy that same item at a deep discount as we get closer to the holidays. Ball State University’s Center For Business & Economic Research predicts “a rush to discount over the holiday season, which stretch 30 days from Black Friday through Christmas Eve.” It’s true that it can take a lot of legwork to grab a deal when the price is at its lowest, but it’s gotten a lot easier now thanks to the Internet and apps that can help you track prices. Before you put an item on layaway, ask the store whether it offers a price-matching program if you find the item on sale elsewhere. If it does, ask for written details so you understand any restrictions, then monitor the price to see if you can do better.
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Be better off charging the item. Yep. It sounds like heresy, I know, but hear me out. When you put an item on layaway, you will pay a flat service charge. At Sears, for example, your fee is $5 for an 8-week layaway contract, and $10 for a 12-week contract. A $10 service charge on a $150 purchase means you are essentially paying about 6.6% more for the item than if you paid cash. On a $300 item, though, a $10 fee is only 3.3% of the sales price. Either way, it may not seem like a lot. But when you compare it to the short period of time you are paying off the item, paying interest may start to seem more attractive!
Compare the $150 purchase with a $10 service charge it to the cost of paying interest on a credit card at 1.5%/month for three months (on a card with an 18% APR) and the card wins out by just a bit. On the larger purchase, layaway wins. Either way, it’s not much of a difference, but it also protects you from another problem, which I’ll address next.
In the examples above, I’m presuming you can and do pay off the credit card purchase during that short time period. Pay it off more slowly, or add the purchase to a card with an existing balance that you are slowly paying off, and the comparison is no longer black and white. And yes, I realize that if you have a card without a balance you probably won’t use layaway. Still the point needed to be made. This is a personal finance blog, after all.
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End up in the hole. If you can’t come up with the cash to make your layaway payment, you’ll usually have a short grace period after which you’ll have to cancel. You’ll forfeit the service fee and typically pay a cancellation fee. In the Sears example, the cancellation charge stated in their layaway guide is $15 for an 8-week contract, or $25 for a 12-week contract, unless restricted by state law.
If you’re able to set aside the money you need for the purchase you are thinking about putting on layaway and then watch sales like a hawk, you may come out ahead. But of course, how many times are we our own worst enemy and fail to save for the things we want to buy? We turn instead to programs like layaway for the forced discipline it provides. It’s better than running up debt, but it does come with a cost.
[Related article: Quick and Easy Ways to Cut Your Household Bills]
Image: Rob Stinnett, via Flickr.com
Gerri Detweiler Gerri Detweiler is Credit.com's Director of Consumer Education. She focuses on helping people understand their credit and debt, and writes about those issues, as well as financial legislation, budgeting, debt recovery and savings strategies. She is also the co-author of Debt Collection Answers: How to Use Debt Collection Laws to Protect Your Rights, and Reduce Stress: Real-Life Solutions for Solving Your Credit Crisis as well as host of TalkCreditRadio.com.
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Layaway is an oxymoron to me. You either can or cannot afford the things you buy. Always best to pay in cash or float your money on a credit card for a month to get rewards points if you can pay your bills.
Thanks,
Ted
CFP®, AWMA®, CRPC®, AAMS®, CMFC®, CRPS®
Co-CEO and Founder of oXYGen Financial, Inc.
http://www.oXYGenFinancial.net
I can see where it had its place once, before credit cards were easy to get and when you wanted to make sure an item you wanted to buy for the holidays, for example, wouldn’t be sold to someone else. But I am just not sure it’s as relevant today – though it’s certainly making a comeback and seems to be popular with many consumers.
I still think layaway is relevant. Remember people who use layaway typically are not going to have a credit card or want to use said credit card. When I was younger and making a weekly pay check verses my twice monthly I used layaway all the time. I would take a portion of my weekly pay and pay down the item till I had it paid off. I know for the world of instant gratification we live in it can seem agonizingly slow but it can be a good way to get thouse big ticket items you wouldn’t normally be able to get.
I am curious, John, do you still use layaway, or do you use credit cards now or just pay cash for big purchases?
For someone like me; who has bad credit; and has a child who I want to buy gifts for this is perfect. Like the article stated, this is a disciplined payments. I am not good at savings, if I was, I wouldn’t have bad credit. Lay-a-way works for my family. I have 3 months to pay it off and I make sure I get it paid off so I don’t loose my money. This is my “credit card”.
That’s another thing I hadn’t thought of Megan. It sort of ties you into that purchase since you don’t want to lose any money if you change your mind. Do you think that’s a good or bad thing?
Missing the best deals. When I have used lay-a-ways in the past if something went on sale during this service the store gave it to you if you ask for it. This day in age a lot of people do not have a credit card. So a lay-a-way would help out, plus gives you a place to keep your gifts a secret from your kids. Most cardholders do not have a 1.5% interest rate. The ones that do usually can afford to pay the balance in full each month. So if you pay the balance in full each month, using a credit card would be the best way to go. I am my own worst enemy and a lay-a-way would give me the gifts I want to give. Even with a lay-a-way you still need to keep the lay-a-way within your ability to make the payments as agreed. I do not have a credit card and I am living on SSI so the stores having a lay-a-way plan this Christmas is a God sent.
Thanks for the perspective Renee. It has to be popular for a reason! FYI, the interest rate I mentioned 1.5% per month, is on a card with an 18% APR. (I’d love a card with a 1.5% annual rate too *sigh*)