By Geoff Williams
If you're like many shoppers, your bank account can't accommodate the long list of gifts you'd like to buy during the holidays. One option, aside from racking up credit card debt, is a layaway program.
Layaway plans are payment plans for merchandise you want to buy. Every week or month, you make a payment until your purchase is paid off –- then you get the merchandise. It's the opposite of the way a credit card works. With layaway, the item isn't yours until the last dime has been paid.
Layaway has been around in one form or another since the 1800s, although it gained popularity during the 1920s and 1930s when it seemed as if nobody, due to the Great Depression, had money. Back then, there were layaway programs for everything from winter coats and jewelry to tires for your car.
Layaway was also popular in the 1940s, when World War II vets began returning home to their families and careers. In the 1950s and 1960s, credit cards started to take off and push aside the need for layaway, but layaway made something of a comeback during the recent recession, which officially lasted from 2007 to 2009.
Kmart (SHLD), which has offered a layaway program for some time, really began promoting it in 2008, during the depths of the recession. After Walmart (WMT) ditched its program in 2006, the chain resurrected layaway in 2011. Sears gave its program up in the late 1980s, except for offering it on fine jewelry, but also brought layaway back. Toys R Us is yet another big retailer that offers layaway.
The Benefits of a Layaway Program
With a credit card, you might pay for your purchases in the months afterward while interest adds up, but you can't fall into any serious debt with a layaway program – in fact, the worst you might be out are some fees. And if you don't have a credit card, layaway may be the only realistic and responsible way you can afford to buy something expensive without wrecking your budget.
Layaway can also lock in a price. If you're eyeing an appliance or item of clothing you believe could be more expensive in a few weeks, getting it on layaway ensures you'll pay the current price.
The Drawbacks of a Layaway Program
There is that delayed gratification thing: You can't have your purchase immediately, but that may not be a big deal if it's a gift for the holidays. If you can't make the payments, many layaway programs have a cancellation fee. Walmart and Kmart both charge $10 to cancel a layaway transaction.
The justification for a cancellation fee is that you are putting merchandise on hold that the store might have sold otherwise. Plus, the store has to set the item (or items) aside for you, so in a sense, the store is serving as a storage unit. That said, in some states, cancellation fees for layaway programs are prohibited.
Some layaway programs charge other fees, including service fees, which usually range from $5 to $10 and are harder to defend. Fortunately, many chains have dropped those, especially for the holiday season. Just make sure to read the fine print before you sign up for a layaway program.
Another downside: The price is locked in. As noted, that's a plus if you're buying a TV that later increases in price, but if the price drops at the store or a competitor, you're locked in to the price you signed up for with the layaway program.
Of course, if the price decreases significantly (by more than $10) and the store won't budge on the terms, you can always cancel your layaway purchase, get your refund minus the cancellation fee and purchase the item elsewhere.
How to Sign Up
Every store's rules are different, but generally, the process isn't difficult. Either take your item to the register or look for the layaway program on the store's website. Some stores require a down payment, usually at least 10 percent of the item's cost, and the amount you can layaway must usually meet a certain threshold. For instance, many stores require an item's price to be at least $50 before they'll allow you to put it on layaway.
Typically, you can make payments any time between the start of the program and the time it ends, and most have a time limit, usually eight to 12 weeks. You'll probably have to make a payment at least once or twice a month. If you don't make the required payments on time, you may be hit with a restocking fee – or be dumped from the layaway program. But minus the fees, your money will be returned.
And, of course, if you're nervous that you might not be able to make payments on time, and you're concerned about the fees, you can always conduct your own layaway plan. Tuck your money in an envelope or separate bank account every week until you have enough to pay for what you want to buy.
By Geoff Williams