It pays to lay off the layaway

Critical look at plans can make fans think twice

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Layaway is illogical. Almost nobody should use it for holiday gift purchases this year.

That stark stance is sure to rile fans of layaway. However, taking a critical look at layaway might get you thinking differently about your money and shopping habits.

Layaway allows consumers to set aside merchandise at the store for a fee while they pay it off in installments over a number of weeks.

For example, you might put a $100 jacket on layaway, paying $25 as a down payment and an additional $10 layaway fee. Then you make three return trips to the store paying $25 each time before taking home the jacket.

On its face, that seems harmless enough. Layaway appears to help cash-strapped consumers purchase an item, and it helps the retailer make a sale.

A win-win?

Hardly. Here are myths and misconceptions about layaway.

"It's better than putting the charge on a credit card and paying finance charges." This is the oft-repeated argument for using layaway. But it's a straw-man argument. Credit cards are not the alternative to using layaway. Paying cash is.

What if you don't have the cash? You save it, perhaps putting aside a little at a time until you can pay the full amount, which is exactly what you do with layaway.

You could stash the money under your mattress, in a cookie jar or in an envelope instead of making repeated trips to the store's layaway counter to make installment payments, which is a waste of your time and probably gas money — although some stores offer online payment options too. Layaway also gives the store an interest-free loan as it holds your installment money.

With the old-fashioned stashing-cash strategy, you wait until you have enough money and go to the store to pay for the item in full, making just one trip. Saving money to pay for holiday gifts is simple and free, savings expert Andrea Woroch agrees.

"I would say layaway isn't the most ideal plan, that if you can save up money every week — put away a certain amount to be able to afford a gift later on — you'll save on that initiation fee," she said.

Maybe not surprisingly, retailers have pointed to the straw-man argument. "Layaway programs provide consumers with a responsible, low-cost alternative to credit cards," wrote Sandra L. Kennedy, president of the Retail Industry Leaders Association, a retailer trade group, in a letter last year to a U.S. senator who criticized layaway. "They typically accommodate a segment of consumers who are either unable to or unwilling to access credit and can be a simple and transparent alternative source of short-term financing."

But using a credit card to purchase an item is completely different because you can take the item home immediately — you've actually bought it — and you don't have to pay it off within a prescribed time frame. With layaway or saving, you don't take possession of the item until you have enough money to completely pay for it. So, layaway and saving are both different than buying on credit, and they take the same amount of time to complete.

"Layaway doesn't charge interest like credit cards do." Even if comparing layaway to credit cards were fair, this still is misguided. Many retailers charge fees for layaway. And those fees can end up being more expensive than finance charges on a credit card.

The aforementioned senator, Charles Schumer, D-N.Y., railed against layaway last year, demanding retailers display the true cost of fees in credit card terms. For example, a $100 purchase with layaway fees can have the same effective interest rate as a credit card charging 81 percent annually, Schumer said.

"These layaway programs are nothing more than hideaways for sky-high interest rates that consumers would never tolerate with a credit card," Schumer said in a news release last year. "The holiday season is supposed to be about giving and not taking, but these layaway programs are taking advantage of people and charging them outrageous interest rates, under the guise of making it easier and more affordable to shop."

Consider the example of placing a $50 sweater on layaway on Oct. 15 and paying installments through Dec. 15, in time for Christmas. Assuming no down payment for simplicity, the total layaway would cost $60, if it included a $10 layaway fee. However, if you bought that sweater with a 20 percent annual rate credit card and paid finance charges for those same two months, it would cost you less than $2 in finance charges versus the $10 layaway fee.

"But this year some retailers aren't charging layaway fees." The news this shopping season is that several major retailers, such as Wal-Mart, Kmart and Sears, are lowering or temporarily eliminating layaway fees. (See store websites for details.)

But that still doesn't make layaway a good idea. Perhaps the biggest problem is nonmonetary — layaway promotes the concept of "buying" something before you have the money, a habit that can harm consumers in many aspects of their financial lives, especially if they use high-interest credit cards or repeatedly use layaway.

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