Yesha Callahan

Is Lay-a-Way A Good Option?

If layaway wasn’t around when I was a kid, Christmases would have been bleak.  My mother was the Queen of Layaway. With four kids, it wasn’t always practical for her to splurge at one time for all of us. Typically, her Christmas layaway shopping started in September, and by Christmas we were a bunch of smiling kids with Barbie dolls, WWF toys,  my chemistry set and typewriter.

Layaway vanished in the 1980s, largely because of the onslaught of consumer credit cards that allowed people to pay now and bring it home now.  “Layaway was popular 30 years ago, before the credit card companies sent out cards to everyone. If you lived in a homeless shelter, you got like seven cards,” says retail consultant Howard Davidowitz, chairman of Davidowitz & Associates. “Once everybody got a card, there was no reason for layaway.”

With many stores finding it hard to entice consumers, a lot have turned to offering layaway as a way to draw in buyers. Last year Walmart announced the return of layaway in time for 2011 holiday shopping season. The world’s biggest retailer joins Sears, Toys R Us, TJ Maxx, and Best Buy in a growing list of stores now offering layaway.

But is layaway a good idea? Not so  says Cornell professor Louis Hyman in a New York Times op-ed. Hyman says the typical shopper would wind up paying less interest by using a credit card, than with layaway. Hyman gives the example of a mom who buys $100 worth of toys on layaway at Wal-Mart. A $10 down payment is required, as is a $5 service fee. “Over the next two months she pays off the rest. In effect, she is paying $5 in interest for a $90 loan for two months: the equivalent of a credit card with a 44 percent annual percentage rate, a level most of us would consider predatory.” Of course that is if you A) Have a credit card B) pay off the balance in full. If you don’t end up paying off the balance, the interest mounts. Layaway can definitely be considered a double edge sword.

 

If you’re considering layaway this holiday season, the Better Business Bureau offers a few tips:

• How much time do I have to pay off the item?

• When are the payments due?

• How much do I have to put down?

• Are there any storage or service plan fees?

• What happens if I miss a payment? Are there penalties? Does the item return to inventory?

• Can I get a refund or store credit if I no longer want the item after making a few payments?

• What happens if the item goes on sale after I’ve put it on layaway?

Have you ever used layaway? Do you consider it an option?

  1. October 19, 2012 - Reply

    I’ve never used lay-a-way but I would consider it if I needed something and didn’t have all the money upfront. I would just make sure to real ALL of the fine print first.

  2. October 19, 2012 - Reply

    Can you explain the math of this layaway plan? If she pays $5 interest for a $90 loan, I calculate that to be (5/90 * 100) 5.56% Interest, not 44%. I’m confused about where the math of 44% came from…anybody know how this works?

    • October 19, 2012 - Reply

      @Pseudonym

      I think it’s because it was calculated as an annual rate.

      • October 19, 2012 - Reply

        @Val

        So, how often do you pay the service fee? Every time you make a payment? Do people leave things on layaway for an entire year, they way they may do credit cards? I just looked up layaway plans and seems the limit is 12 weeks (3 months), so to extrapolate to a $5/month payment for 12 months is faulty or only works under the assumption that someone is keeping a constant rotation of $90 items on layaway throughout the year- which is not how it should be used. At most, if the $5 interest is $5/month for three months, that would be 16.7%, which is pretty standard for credit cards.

        Also, that $5 flat service fee would calculate to an even lower interest rate if items purchased cost more than $90. If it’s $300, then $5/$300 is 1.67% interest.

        BUT, with all that said, I honestly think that if you don’t have the cash, you should just not buy it . If you can’t afford to buy all the Christmas presents before the holiday, how about giving everyone a single really nice or trinket gift for Christmas and- if you must (and have the money)- take the kids out for an after-Christmas shopping afternoon and get the same clothes for a fraction of the price? (They’re not going to wear the clothes until after Christmas anyway.)

    • October 20, 2012 - Reply

      @Pseudonym

      @Pseudonym, the math in the article is very wrong.

      (flexing my finance muscles) The way a creditor would calculate the monthly interest rate goes like this: If the term of the loan is 3 months, and the loan amount is fixed (since the customer can’t add items to an already existing layaway plan), the effective rate equals $5 (total interest) divided by $90 (amount borrowed) divided by 3 (number of months within the interest rate period). That amounts to 1.85% per month, and if you were to annualize it, you’d multiply 1.85% by 12 for an APY of 22.2%, which is right around the same APY many credit cards charge for people whose spending habits and income would make layaway attractive to them. You’re also right that the more someone puts on layaway at once, the lower the effective interest rate and APY would be, and since it’s a fixed loan as opposed to a revolving credit card, there would be no compounding interest inflating the total amount paid over the life of the loan.

      From the retailer’s vantage, layaway is profitable because they get all their interest up front, so paying the balance off early doesn’t cut into the bottom line. From the consumer’s vantage, layaway is attractive because the loan term is so short and doesn’t revolve so it caps the total amount of money that you’d be obligated to pay. The decision to put something on layaway vs a card should be made as such:

      1. Take the APY on your credit card and divide by 12.
      2. Take the layaway service fee ÷ the balance you have to pay off ÷ the number of months you have to pay it off
      3. If 1 is lower, use your card; if 2 is lower put it on layaway (all predicated on your ability to pay either)

      **Number 2 assumes a one time service fee as opposed to an annual or recurring fee. If the fee is annual: fee ÷ balance ÷ 12; if it’s monthly: fee ÷ balance

    • October 20, 2012 - Reply

      @Pseudonym

      Correction: The $5 fee is for 8 weeks, it’s $10 for 12 weeks and purchases over $400. So the corrected math is: $5 ÷ $90 ÷ 2 = 2.78%, or APY of 33.3%. For purchases over $400 on the 12-week plan, the math goes: $10 ÷ $320 ÷ 3 = 1.04%, or APY of 12.5% (a 20% deposit would be required on the $400, so the outstanding balance would be $320).

      • October 21, 2012 - Reply

        @Mademoiselle

        yO!!!! Thanks for explaining that!

  3. October 19, 2012 - Reply

    I think layaway would suit me, because I always hate myself for not getting something and then going back to find out it is no longer there.

    I am practising saving for what I want these days, instead of just swiping a card. This method is teaching me discipline, patience, and goal setting.

    My mom used to join an informal savings pools aka partners. A group of people go into saving a portion of their income weekly and then each week one person is paid all the money from the pooled savings until everybody gets paid and the partner ends. One person has to be the banker, and this person is responsible for making sure everyone pays, and everyones gets paid. Good partners where nobody is scamming go on perpetually, and a lot of times the banker gets a tip from the savers. It’s a form of forced savings and because you don’t have access to the money until your payout time, you can’t touch it. A lot of folks got their downpayment for homes, furniture, trips, tuition and all kinda stuff from these informal saving plans.

  4. October 19, 2012 - Reply

    I remember my mom would lay away stuff as a kid!! I did not even know that was stll an option today!! I don’t think I believe in it though if it’s possible to stay away from it I suggest folks do that!

  5. October 19, 2012 - Reply

    Starla I’m interested in hearing more about this pool savings plan! Funny I actually was thinking about starting something similar a few months ago. Would be a huge help for folks struggling, especially those with kids!

  6. October 19, 2012 - Reply

    @Coco. I would be more than happy to assist in any way.

    It really does work. It can be risky, and not unknown to drama. But if you have a group of people who are gainfully employed who are serious about saving for some goal, this is a lifesaver for many.

    It is so simple. Basically, lets say you have 20 people, this does not have to be the case, just for example sake. So twenty people go in, let’s say they are throwing in $50/wk. Then basically each week the total should be $1000, and it would continue for twenty weeks until everybody get their pay out of $1000. If they want the pay out to be greater they either have to pitch in a higher amount like $100/wk which would then push the pay out to $2000, or get more people in the pool. The banker’s business is to keep a log of everything, make sure everybody pays, collects, keep the money safe, and payout on time. The banker must be a very good record keeper and not leave anything up to memory. Every payment and payout must be documented. If someone has an emergency and needs to get their payout sooner, then the banker must negotiate with someone else to push their payout back. So there is some form of diplomacy, negotiation, and flexibility necessary to be a good banker.

    If you want to know anything else just ask. I think a few of the regulars on here are of Caribbean extract and they would also know about partners. Maybe they can add to it, in case I left out anything important.

    • October 19, 2012 - Reply

      @Starla

      @Starla In the Caribbean is’s called a sou-sou (also in Africa I think) and it’s a great money saving tool! A lot of ppl do it without givving the banker a tip though some do and call it box. I’m 30 and have done it all my working life, my sis even did it with her friends in school. It’s especially helpful to people who wouldn’t qualify for loans or credit cards. I know ppl who’ve paid for trips, vacations, furniture, increased their savings and even done home repairs or built homes using sou-sou. The key is to be in a group of responsible, trustworthy people, have payments you can afford and not blow the payout when you get it.

      Don’s be fooled by the informality, based on the value of the payment and how many hands/shares in a pool you have, ppl can collect $10,000.00 +. It’s great for the self-employed who need to buy equipment/tools because it’s an interest free loan/advance.

      • October 22, 2012 - Reply

        @Yaenelle

        I think it’s common to the diaspora. In Haiti it’s called eso (northern Haiti at least).

  7. October 19, 2012 - Reply

    I’ve never used lay-a-way and I would not consider it an option.

  8. October 19, 2012 - Reply

    @ Starla, a merry-go-round is what my moms groups called it

  9. October 19, 2012 - Reply

    Loves it! what a fun name that is. Is your mom AA? It would be great to know where in the diaspora Black people have been saving in this fashion.

  10. October 19, 2012 - Reply

    Probably the best reason I’ve heard for people to use layaway is to help manage spending.

    Since we’re only talking a few months any fee is money lost versus just saving and buying the item yourself but not everyone can effectively do that, especially when money is tight, and putting a few dollars down every week means you don’t have to worry about it.

    As with all “financing” I’ve found that it comes down to knowing the details and doing the math. More and more stores are offering the option with no costs provided that you complete the purchase with only a $5-$10 risk if you don’t. If you can’t save well that’s not a bad gamble.

  11. October 20, 2012 - Reply

    OH! MY! GOD! had anyone else seen the walmart and k mart commercials for lay a way? i just love how main characters that are excited as hell about lay a way are black for both commercials. SMH

    • October 21, 2012 - Reply

      @chanela17

      I think they have one with a white woman, too

  12. October 21, 2012 - Reply

    Layaway isn’t as bad as some are making it out to be you are able to put furniture on lay away at furniture stores where it canbe storEd until you’re ready to move.Additionally it’s helpful during the holiday season when large ticket items go on sale and you may not have the funds at that time. You can usually do a price adjustment as well if some items on lay a way go on sale.

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