Is Layaway the Smart Way?
Layaway sounds like a good way to avoid getting into debt at holiday time, but depending on the circumstances, layaway can cost the consumer more than using a credit card. Here is some information to help you make good choices.
The main advantages to layaway are the ability to “reserve” a special gift by making payments to the store before the holiday and avoiding credit card debt. But few things are free and layaway is no exception.
Is it worth the service fee?
Layaway can be a smart way to shop for the holiday if you are aware of all the layaway policies for any retailer you use for the service. There is almost always a non-refundable service fee for the layaway. Service fees are usually $5 to $10. Stores may charge multiple service fees each time the layaway service is used. So multiple fees may be charged if items are put on layaway at different times. And layaway service fees are non-refundable.
Will you pay other fees?
If you cannot make the payments according to the store’s layaway policy, you will lose your layaway item and any money you have paid will have fees deducted. Most stores offering layaway charge $10 to $25 as a cancellation fee. Some stores may also charge a re-stocking fee.
What are the rules?
Stores differ but typical rules may include the following:
• Merchandise exclusions. Some stores restrict layaway to certain types of merchandise. Examples are limiting layaway to in-store items versus those available online or excluding jewelry or other categories of goods.
• Down payments. Most stores require a minimum down payment amount in addition to the layaway service fee.
• Terms of payment. All stores have a deadline date by which payment in full must be made. Some stores also require minimum weekly payment amounts per item.
• Terms of pick up. Most stores specify how and when you must pick up your layaway as well when you cannot do so. For instance, Saturday pickups may be excluded.
• Other restrictions. Most stores have a minimum price amount per item required for layaway.
What’s the refund policy?
The service fee and cancellation fee is usually deducted from any layaway that is canceled or not completed according to the store’s terms.
The Bottom Line: Is Layaway worth the price for you?
Depending on the fees you will end up paying, using layaway for a lower cost item may cost you more than you’d pay if you charged it to your credit card. Here’s an example.
Comparison of a $50 holiday gift item purchased on Layaway versus a typical Credit Card
- $5 service charge
- Pay cost of item plus service charge over 2 months = $55
- (42% APR)
- 18% APR interest rate on purchases
- Pay off over two months after charging = $51.50
- (18% APR)
Using the same terms, a $100 item would cost $105 on a two month layaway and $103 on the credit card. When comparing layaway to using a credit card, you should consider not only the interest rate of the credit card but also whether you’re confident that you can and will pay the credit card balance in the same period of time as the layaway. Some people are afraid of using too much credit and feel it’s worth the slightly higher cost of layaway to pay as they go. The key is to be aware of your choices. And unless the item is something that’s likely to be out of stock by the time you’ve saved the purchase price, saving to pay cash will always save you money over credit or layaway.
© Hummingbird Credit Counseling and Education, Inc. 2011. All rights reserved.