Is Layaway Right for You?

Walmart Layaway
Walmart Layaway

Last week, Wal-Mart (WMT) announced that it would bring back layaway for the holiday season, joining other large retailers, including Sears (SHLD), TJ Maxx (TJX), and Toys "R" Us, in allowing customers to pay for expensive items over time.

Unlike the popular "no interest for six months" approach to consumer financing, where buyers can take their purchase home immediately and pay for it over time, layaway plans require you to leave the item at the store until you pay for it in full. There often is a one-time service charge as well.

Layaway plans have been around since the 1800s and became popular during the Great Depression. But once credit cards took over, fewer people used layaway, and many retailers did away with it altogether.

Now that it's making a comeback, is layaway right for you?

The Advantages of Putting Off Paying

Layaway has two primary advantages for the consumer:

1. You don't need pristine credit to put something on layaway: Since the store holds on to the merchandise until it's paid for, there's no need for a credit check. So shoppers with less-than-stellar credit can essentially "finance" purchases interest-free over time. For the large number of consumers who've taken a big credit hit during the housing crisis, this is a decent alternative to traditional credit.

2. Instant impulse purchase control: Layaway forces a budget on those of us who are prone to overspending, especially around the holidays. Using layaway, you can make your gift choices now, then pay for them over the next three months. If you've overspent, you can usually pare back your haul with little to no penalty. When the holidays arrive, you can focus on the joy of giving -- and not the headache awaiting you when those January credit card bills arrive.

The Drawbacks of Layaway

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Not every retailer offers a layaway option. (Wal-Mart's plan is limited to toys and electronics that cost $15 or more.) And while layaway is a great way to impose more discipline on your shopping, it doesn't actually prevent overspending -- you still have to be able to make the payments.

Also, since there's no credit check, paying on time doesn't help those trying to build up their credit rating. Alternatively, failure to pay doesn't ding you, though you may be charged a nominal cancellation fee. Again, at Wal-Mart, customers who cancel or do not pick up the layaway item by Dec. 16 must pony up $10 for changing their plans.

The Right Way to Use Layaway

For larger purchases that you're confident you can pay for over time, layaway beats those "no interest/no payments for X months" deals hands-down. Those offers require credit checks and if you're as much as a minute late on a single payment, the retroactive interest charges and penalties wipe out any potential savings.

To use layaway on less-pricey items, limit your shopping to one store and make your purchases all at once. That keeps the fees to a minimum, and ensures you only have to remember one retailer's timeline and terms for payment.

Of course, saving up and paying with funds on hand is still the smartest way to go, even for big outlays like holiday gifts. Who knows? Maybe those local-bank "Christmas Clubs" will be the next old-fashioned notion to make a comeback.

Motley Fool contributor Robyn Gearey does not own shares in any company mentioned here. The Motley Fool owns shares of Wal-Mart Stores. Motley Fool newsletter services have recommended buying shares of and creating a diagonal call position on Wal-Mart.

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