Layaway, a blast from the past, is making a comeback. Layaway was popular before credit cards were readily available. It was a way to pay for something over time and then take possession f the item when you paid for it, in full. You had a payment schedule and normally a one-time fee for setting up the layaway account.
As it became easier to get credit cards, layaway lost its appeal. By charging it, you could take the item home immediately instead of waiting for several months. Who wants to delay taking possession of the latest gadget or trend? We are spoiled and want instant gratification.
Because of the economic conditions and continued high unemployment rates, some retailers have reinstated or have begun to offer layaway. The larger retailers offering layaway include Best Buy, Burlington Coat Factory, Hallmark, Kmart, Marshall’s, Sears, TJ Maxx and Walmart. Walmart is only allowing layaway during the holidays for toys and electronics.
What is layaway? You don’t take receipt of the item until you pay for it. The retailer stores the merchandise, you pay a down payment of 10 to 20 percent on the item, sign up for a payment schedule of usually 30 to 90 days, and pay a one-time service fee of $5. If you are unable to pay for it or decide you don’t want it, you pay a non-refundable fee of $5 to $10.
For example, you purchase an item for $200, put 10 percent or $20 down on it and pay a $5 service fee. You pay the remaining $180 over 3 months at $60 a month. When it is paid in full, you take it home. Let’s compare this to charging the $200 on your credit card. If you don’t pay in full each month, you would be paying at least 14 percent annual interest rate or $20 in interest for a year for this one item. The layaway service charge of $5 is less. The interest charge would be much more, if you don’t pay in full each month and carry a balance. If you pay your bills in full, you really don’t need layaway.
This can be attractive if you are over your limit on your credit card, pay very high interest on your credit card or don’t have a credit card. The catch is, you still have to come up with the cash to pay for the merchandise. Layaway doesn’t help you build credit, because these transactions are not reported to the credit reporting agencies.
Layaway lets you secure the merchandise for the future and pay as you go. This method may be more popular this holiday season, but you would need to start buying the merchandise now, so you will have it paid off in time. It is an alternative to credit cards, but not for everyone. You could do the same by saving for the merchandise.
Credit Expert, John Ulzheimer, is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. Follow him on Twitter here.