When the commercials touting layaway programs at many of the nation’s top retailers started airing in the past couple of years, it may have seemed as though we were facing a sudden throwback to the 1970s. After all, layaway had been steadily declining for decades, as more and more low-income shoppers had ready access to credit—which was both easier on the shopper, who can take home their goods right away, and on the retailer, who can leave the paperwork to the credit card company and not worry about storing partially paid for goods.
Of course, the economic crash of 2008 changed everything. Suddenly, we were back in an economy where layaway made sense, just like in the 1970s. In the late 2000s, with the tightening of credit, suddenly it was very difficult for lower-income individuals to make big purchases. So, retailers dusted off their layaway programs and started making an old system new again.
How It Works
Most retailers offering layaway require you to purchase a minimum of $50 worth of merchandise (and there are several non-eligible items, like cell phones). You pay a $5 fee for using the layaway program and generally must put down 10% of the purchase. The layaway term usually lasts eight weeks, during which time you make regular payments. If you miss a payment, you have a period of time (about a week) before the merchandise is re-shelved and you forfeit the purchase. If that happens, you will receive your money back, minus a cancellation fee (generally about $10).
Pitfalls and Benefits of Layaway
If you crunch the numbers to compare layaway to credit cards (not to mention just saving up the money yourself), layaway is the clear economic loser. As Louis Hyman points out in his New York Times op/ed piece, a shopper who purchases $100 worth of merchandise, putting down $10 and paying the $5 service fee is “in effect…paying $5 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.”
In a straight dollars and cents comparison, layaway truly does not make any sense. Even if you do not have access to credit, it would make more sense to put cash aside every week for eight weeks before you make your purchase. However, people are rarely rational when it comes to money. Having money set aside for a particular purchase does not mean that you will leave it for that reason, especially if you are struggling financially. Layaway forces you to save up the money for your intended purchase, whereas putting it aside on your own leaves it available for other uses.
Similarly, putting a purchase on credit only makes sense if you pay off the bill before the end of the layaway term. But many credit card users only make minimum payments, meaning they will pay much more interest on a purchase than the $5 layaway service fee represents.
In short, layaway is a good option for those who are still struggling with their finances: it forces good financial habits.
The Future of Layaway
With Sears recently announcing the beginning of vacation package layaway, it’s clear that layaway is not going anywhere soon. Although layaway is not necessarily the best method for making purchases—it’s always a better financial plan to save up money on your own—it does put some major purchases, like vacations, Christmas gifts, and back-to-school items, within the reach of individuals who are struggling financially.
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