Layaways vs. Credit Card Purchases
The term “layaway” has been around for decades. The increased availability of standard and in-store credit cards, however, has made layaways less fashionable in recent years.
That seems to be changing of late. Certain retailers are finding out that a layaway is a sure-fire method to increase sales, while avoiding the potential risks involved with extending credit.
For consumers who have grown up with easy access to credit, a layaway is an agreement between a merchant and a buyer which the store reserves an item for the buyer – while the buyer makes regular payments to the merchant over time. Once the item has been completely paid for, the buyer receives the item.
Layaway items typically involve major purchases, such as those items that are just out of the buyer’s financial reach at the time of purchase. For example, a shopper may want a new washer, dryer or television, but doesn’t have the $500 needed.
If the store has a layaway plan, the store will arrange a payment plan over time that the buyer can afford. In this example, every week the buyer brings in $100 to the merchant. At the end of five weeks the washer, dryer or television would be considered paid in full – and released to the buyer. If the buyer does not complete the layaway agreement, the merchant will refund the monies already received, less a transaction fee. A layaway plan is in complete contrast to a credit transaction where the purchased item is received upfront prior to paying for the item.
However, when an item is charged on a department store card there are additional fees involved. For example, a buyer has a department store credit card and buys the $500 stereo. The buyer takes home the stereo that day but interest begins to accrue on the purchase immediately. If the department store card has a 19 percent interest rate and the buyer just made the minimum monthly payment (of about $15 per month), it would take nearly four years to pay off the original $500 debt in addition to nearly $200 in interest. In this scenario, the $500 stereo system ended up costing $700.
The extension of credit to consumers over the years has led to different consumer spending patterns. Consumers tend to want their purchases immediately. “Buy now!” the advertisement says or “Don’t wait until it’s too late!” There’s nothing wrong with buying something on credit; credit helps make the economic world go ‘round. But buying something on credit and not being able to handle credit responsibly can have negative consequences.
Besides not requiring any interest to be paid on a layaway, if the layaway transaction is not completed, the merchant simply returns the item to the sales floor and refunds the funds received from the potential buyer. When an item is purchased with a department store credit card and the consumer doesn’t make the payments, the borrower’s credit history will be damaged, limiting and even prohibiting the use of credit in the future.
For those who can wait to take possession of an item that for the time being is financially out of reach, a layaway is a sensible, safe option compared to buying on credit. It may not be as immediately gratifying as buying on credit, but it is a smarter option for borrowers on a tight budget.