Layaway Plans – Good or Bad?

By Beth Montgomery

With the closely approaching holiday season, you may be considering the layaway programs so many companies have implemented in their retail stores. While these programs may seem appealing, it may be better for you to save up the money on your own and pay for your gifts in full later. Years ago, before the common use of credit cards, layaway programs were quite popular. Now that the economy has taken a downturn and more people are unable to establish credit, these programs are making a comeback through retail stores like Toys R Us, Sears, KMart, and now WalMart. Layaway allows shoppers to reserve items in the store and pay in installments without incurring interest or affecting the customer’s credit score. With one out of every seven consumers already using 80% of their credit limit, I wonder if it is smart to encourage these types of programs. Financial education has taken a back burner in our society, and this lack of knowledge isn’t helping the average consumer and their spending habits. On the other hand, people are having a hard time with the holidays during this recession, and some don’t have the option of using credit. For these people, financial illiteracy isn’t the problem. Layaway programs could help them through these difficult times because layaway allows them to buy their gifts without finance charges and with the ability to spread out the payments.

Pros of Layaway Programs

Sometimes, it can be easier for consumers to see a list of the facts related to a decision. Here is a list of the many advantages to layaway programs.

  • The cost is divided into several payments. The full amount doesn’t need to be presented at one time.
  • Fees added to the total cost of the items put on layaway are usually much cheaper than the monthly interest possible on a credit card.
  • You can set aside holiday gifts before they go out of stock.
  • The shopping rush that can happen over the holiday season can be avoided.
  • Impulse purchases can be realized and you have the option of backing out of buying an item (for a fee in some cases).
  • Failed payments will not reflect on your credit report
  • You can plan ahead for other special occasions (showers, weddings, birthdays, etc.)
  • More expensive items are available for purchase when a maxed-out credit card may have prevented that purchase before layaway.
  • The retailer stores the items. It isn’t necessary for you to find space in your own home.
  • Responsible use of layaway could help those who have a hard time managing money. It is necessary for them to plan ahead and make payments in order to get what they have bought.
  • You can put an item on layaway while it is on sale and keep that sale price, and if the price goes down during the layaway period, you may be able to get the item for that lower price (in some cases).

Cons of Layaway Programs

There are also many disadvantages to layaway programs. Before you decide to put any purchases on layaway, you should consider all of these cons.

  • Inexpensive items placed on layaway could result in fees equal to or greater than a credit card interest rate.
  • The store policy may require the initial price of an item be paid, even if the item goes on sale during the layaway period.
  • Fees attached to layaway programs can get expensive. These fees can range from $5 to $150 or more.
  • It is easier for undisciplined consumers to spend more than they can afford.
  • If the store goes out of business, the items and the money paid for layaway could be very difficult or even impossible to get back.
  • If payments aren’t made, the money already spent on the items placed on layaway could be lost, but will most likely be reimbursed in store credit or with a gift card.
  • Some consumers use credit cards to make payments on their layaway plan, which defeats the purpose.
  • Temptations to buy more items could arise when you go to the store to make a layaway payment.
  • Some say that if a customer can’t pay for something all at once, then they shouldn’t be making that kind of purchase in the first place.

Layaway programs can be a good option if they are used properly. However, the best way for anyone to buy holiday or other gifts is always with cash. Saving up your money and then making a major purchase will always be more satisfying than a layaway program.

Beth Montgomery is an author working for a company that focuses on financial education. Her articles relate to business, finance, and credit options for all credit ratings.

photo Attribution Some rights reserved by DaMongMan