Personal Finance

Why You Should Think Twice About Layaway Plans

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September has only just begun, but holiday layaway plans are already making the news.

Wal-Mart, the world’s largest retailer, recently announced plans to extend its holiday layaway program by a month this year, in addition to tripling its service fee from $5 to $15. The catch to the Wal-Mart plan is that consumers can get that $15 back in the form of a store gift card – a new, more consumer-friendly perk that eliminates the cost without cutting the convenience.

While that can be a good deal for consumers who are going to follow through on their layaway purchases, there are still some considerations that prospective shoppers should keep in mind before singing up for a layaway program with their retailer of choice.

“Layaway is like that practical Christmas gift,” says Gerri Detweiler, Director of Education for Credit.com. “It’s not horrible, but it’s not fabulous either.”

Retailers are increasingly getting in on the layaway game, according to a spokeswoman for the National Retail Federation. Last year, they were even pushing layaway plans with major ad campaigns.

Here’s how a typical holiday layaway plan works. First, you choose the item or items that you want to buy for the season. Then, you make a down payment that’s normally around 10%-20% of the total price of the product, plus a service fee. That service fee can vary, but is typically around $5-$15.

Next, you start making payments on the product on a weekly basis until the product is paid off. Here’s where it can get tricky. Miss a payment, and the layaway is considered canceled by the retailer and you can get back the money you’ve paid for that product, but you will normally forfeit the service fee and have to pay a cancellation fee also. Certain states like Ohio and Rhode Island have passed legislation limiting whether or not the retailer can keep the service fee, so make sure you read the fine print on any layaway contract before you sign up to fully understand what happens if you can’t pay or just decide you don’t want the item.

The other downside to layaway plans is something that many consumers don’t think about, Detweiler says.

“By putting stuff on layaway you may pay more – either because you stop shopping the sales for that item, or because you pay a fee if you don’t end up buying it,” she says.

Prices on holiday items can vary significantly depending on where and when you shop. By hooking yourself into a layaway program for a TV that costs $450, for example, means that you might miss out on the last-minute sale for that TV that cuts $50 off the purchase price. You sacrifice the flexibility for the convenience of a payment plan, but that may be a deal you’re willing to make.

Detweiler says layaway can be helpful for some consumers in that you can use it to space out a payment plan on regular intervals in the run up to Christmas.

“It can help you stay out of debt. You can take down the holiday decorations knowing you won’t be faced with a new debt you have to try to pay off,” she says.

Is layaway preferable to paying the interest on a credit card? Let’s crunch the numbers on that $450 TV as an example. If you were to sign up for the Sears layaway plan for that $450 TV on an eight-week contract, you would pay a $5 service fee and a $91 down payment to start off. Then, you would pay $91 every two weeks for the next eight weeks, totaling $455. So, the “APR” on that plan would be about 9%, beating many current credit card APRs.

All consumers should note, however, that layaway plans are not traditionally reported to credit bureaus, so this won’t help you rebuild your credit score and report. To check where you currently stand, you can pull a free copy of your credit report once a year or you can check Credit.com’s free Credit Report Card to see where you stand.

Image: taberandrew, via Flickr

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  • Anthony

    Hi Kali. I was actually looking at TVs the other day and considered a layaway option. So I’m a little confused about your comparison to the credit card APR. Where is the $91 downpayment figure coming from? Is that $455/5 payments? And if so, where is the extra $5 coming in? Are there two $5 fees at Sears? How did you get to the 15%?
    I hate to be obnoxious, I’m just a little confused. Thanks :)

    • Kali Geldis

      You’re not being obnoxious at all! I’m happy to help.

      You’re dead on about the $91 being made in five installments (one downpayment plus four bi-weekly payments). The $5 service fee is spread out over the five payments. Sears has a really nifty calculator at the link in the story that does the calculations for you, which makes it super easy.

      I compared the layaway plan to a credit card APR this way – taking the extra fees for a two-month layaway and treating that like an interest rate on the item. I did make a mistake in calculating the “APR” and am fixing that right now. The interest rate is really more like 9% – see the calculation here: http://banking.about.com/library/calculators/bl_APR_calculator_load.htm?amount=450&apr=0&term=2&costs=5

      Hope that helps!

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  • Nancy Greer

    You may pay a little more for layaway but….when take the product home it is paid for and you do not need to worry about that after Christmas bill coming. yah!!!!

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  • http://www.Credit.com/ Gerri Detweiler

    Yes, a store credit card can help you build credit as long as you pay it on time and keep the balances low. It’s perfectly fine to charge something small every once in a while and paid off in full. You don’t have to use it every month, and you don’t have to carry debt.

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