The Pros and Cons of Layaway Plans

These days, a growing number of retailers are implementing a variety of promotional tactics to help draw in new customers. And some retailers are now bringing back one of the oldest retail-marketing tactics in the book: the layaway plan.

Background

Layaway is a unique method of financing purchases that allows you to place merchandise on hold at a store, making small payments over time until its paid for. Typically, setting up a layaway plan is as simple as making a down payment on a purchase item, and in some cases, paying an additional layaway fee for the privilege of doing so.

History

Layaway first became popular in the 1920s and 1930s when the Great Depression was in full swing. It was developed as a way to make large purchases more affordable by breaking them down into smaller, more manageable payments. For many years, layaways were very popular and available at most major retail outlets. However, during the 1980s, layaways popularity began to wane in large part due to the rise in credit card usage.

Benefits

On the surface, layaway plans seem like a great option for budget-minded consumers. They offer a number of benefits including:

• Affordable Payments. Layaway allows you to spread the cost of your merchandise out over several smaller payments.
• No Interest. Unlike credit cards, layaway plans don’t (typically) charge interest on the outstanding balance owed.
• Won’t Harm Your Credit. If you miss any payments or default on your layaway plan, it won’t have a negative effect on your credit score.

Drawbacks

Even though there are a number of seemingly positive aspects of layaway plans, there are several drawbacks that need to be considered. Some of the major disadvantages of layaway plans include:

• Delayed Access to Merchandise. Unlike a credit card purchase, layaway plans require that you make payments for weeks, or in some cases, even months, before you get access to the merchandise.
• Increased Overspending Risk. Spreading payments out over time can make high dollar items seem less expensive than they really are, leading to over commitment and, consequently, overspending. Before using layaway, it is important to set a realistic budget upfront (one that includes an estimate of interest and fees if youre planning on financing the purchase) and then stick with the plan to avoid overextending yourself financially.
• Layaway Fees. Merchants will typically charge a layaway fee that, at first glance, might seem affordable. Layaway fees just might wind up costing you more than you would have paid in credit card interest if you had just charged the merchandise to a card instead, which is true for lower cost purchase items in particular.
• Cancellation Fees. If you change your mind and decide not to go through with the purchase, merchants will charge a cancellation fee or restocking fee.
• No Credit Score Benefits. If you pay off your layaway purchases quickly without missing any payments it won’t do anything to improve your credit score. If, on the other hand, you charge the purchases on your credit card and pay them off quickly, it can give your score a boost.
• Opportunity Costs. With layaways, in order to get your merchandise paid off by the holidays, you might need to start shopping in October, well in advance of some of the best sales and discounts of the holiday shopping season.
• Increased Bankruptcy Risk. In today’s tough economic climate, its not unheard of for a retail chain to go out of business with little warning. If you have a layaway plan set up at a store that winds up having to close its doors, it will be difficult, at best, to recover your merchandise or the money that youve already paid out.

Major retailers are reviving layaway programs as a way to help lower-income consumers who are either unwilling or unable to access credit to buy gifts during the holidays. Layaway programs provide consumers with a responsible, low-cost alternative to credit cards that allow customers to buy an item that they want but the flexibility to pay for it over time without accumulating debt. They are remarkably simple and transparent. And unlike credit cards, the fees and terms never change.

As always, the best financing option for any purchase is simply to pay cash. At the risk of sounding like my grandfather, Ill say it anyway: If you cant afford to pay cash for an item, in particular for purchase items during the holidays, you probably shouldnt buy it at all.

Photo Credit: Len Penzo