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Stay Away from Layaway

Sept. 15, 2011
Credit Cards
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Wal-Mart will be joining Best Buy, Sears, Toys ‘R’ Us and others in offering layaway purchases this holiday season. The decision was a response to increased customer need and demand for more accessible payment options. But while layaway seems to offer a viable option for affording those big holiday purchases, it is not the best choice for buyers on a budget.

Back from the dead

Retailers began offering layaway during the Great Depression to allow customers to gradually pay for their purchases over time. With the explosion of credit cards, consumers picked up plastic as a more convenient method of deferring payment. Now, with debt plaguing every wallet and bad credit seemingly more prevalent than good, people are looking for answers beyond the card.

Here’s how modern layaway works. You grab whatever fancy toy or noisy gadget Santa’s throwing under the tree and haul it over to the layaway department. Immediately, you’ll have to put money down to satisfy two categories: the down payment and the layaway fee. The down payment is usually something like 10% of the total cost and goes toward paying off the item. The layaway fee is an extra cost in addition to what you’re already paying for your purchase, and generally runs 5-10% of the total cost. If you can afford that much, they’ll stash your merchandise in the back until you’ve paid the full amount.

Put it in the piggy

Layaway might sound like a good substitute for credit, but you’ll probably end up paying more in fees than you would in credit card interest. The obvious solution is to get yourself a piggy bank and accumulate your money fee-free. If you can’t afford a pig, cut a slit in a Pringles can and that will work just as well.  The key here, of course, is self-control: not popping off the lid early to splurge on ice cream or foot massages. As long as you can resist the temptation, you can save up for your item without paying a cent in fees.

Let’s look at how layaway fees compare to credit card interest. We’ll use one of the big guys—Best Buy—as an example. Best Buy’s layaway fee (non-refundable) is 5% of your purchase’s total cost. With a fairly standard  APR of 12%, you’d have to spend 5 months paying off your debt to incur an equal amount in credit interest that you pay in layaway fees. And how many months is it from October, when you’ll actually start your holiday shopping, to December? You’d save money by putting the purchase on a card and paying it off after the holiday season.

Did I mention the cancellation fees? At Wal-Mart, it’s $10 if you can’t or don’t want to continue with your payments. You have to be certain of your purchases before you commit, and who knows which game console little Timmy will want three months from now? And in case you were wondering, paying through a layaway program definitely does not help you build credit.

Explore your options, spend less money

Instead of locking yourself into a long and costly payment program, consider the alternatives. If you don’t trust yourself enough not to prematurely smash open the pig, put the money into a savings or high-yield checking account. By doing so, you’ll actually earn interest as you save rather than paying it down the line.

Remember, credit cards are always an option. If you have apprehensions about racking up debt, keep in mind the comparative savings you’ll receive if you keep up with your payments. Also, there are a lot of low interest credit cards that offer a 0% introductory purchase APR. That means no interest for the first 6 to 21 months. Pay it off before that period ends, and you’re only charged for the actual cost of your purchases.

If you’re having difficulty obtaining a credit card, there are always credit cards for bad credit available, and they’re not that bad. The Orchard Bank credit card, for example, offers reasonable rates for people trying to rebuild credit. If you want to get a handle on your finances, layaway is not the way to go.

Before you’re enticed by the promise of easy, affordable payments, check out the free alternatives. They’re out there—you just have to look!