The Truth About Layaway
As the holidays approach, many are considering layaway to help make expensive shopping lists more affordable. In fact, about a third of consumers say they’re “somewhat” likely to buy a gift on a layaway this year, according to CouponCabin. More than half say layaway helps them budget and buy larger items they couldn’t afford to pay all at once. It also helps with avoiding credit card debt and reserving popular items that may sell out quickly.
The service became popular in the United States during the Great Depression as an option to finance purchases with retailers. One could simply hold an item with a store, making incremental payments until it was finally theirs. But with the advent of credit cards, layaway fell out of favor -only making a comeback recently in the aftermath of the 2008 recession.
Fast forward – consumers are more leery of credit cards and facing a sluggish economy so it’s no surprise that Wal-Mart reportedly racked up $400 million in layaway sales last month, half of the amount they had during the entire 2011 holiday season. With other retailers experiencing similar trends, it’s clear that consumers still see layaway as a useful tool, but should they?
While there are obvious pros to layaway, you may also want to consider some potential pitfalls.
Read the Contract Carefully
Remember that layaway is a contractual obligation with fees and liabilities. Sears, Wal-Mart, Toys “R” Us and BestBuy are just a few retailers with layaway payment plans. Most of these stores charge fees to initiate and cancel a layaway contract along with a fixed cost or percentage (whichever is more) as downpayment on your item. At Sears, for example, it costs $5 per item for a new layaway and $20 or 20% as a downpayment on the item. And if for any reason you have to cancel your layaway, it’ll cost you an additional $15. Worst yet, when canceling your layaway with most retailers, you forfeit the money you’ve already spent in fees. You could also miss out on deals in the event that your item goes on sale after you’ve put it on layaway.
Also See: DIY Layaway Strategies
Calculate Your Options
Before financing anything, it’s important to calculate the cost of your options. Let’s take a hot holiday gift like the a new iPad. With a $500 price tag, putting the device on layaway with BestBuy would require a non-refundable fee of 5%, or $25. After a 25% downpayment of $125, you could make bi-weekly payments of $63 until it’s yours. Now let’s say you put the gadget on your credit card and make equal monthly payments. It would cost much less, $11 to be exact, at the average interest rate. But if like many Americans you lower that payment to a minimum of around 10%, you could end up paying $82 in interest for the same item.*
Photo Coutesy, Tax Credits.
*I used a calculator from ConsumerCredit.com with an interest rate of 16.89%, the average rate as of Sept. 30.
