Recent economic turmoil has led to a resurgence in layaway plans, a payment alternative that originated amidst the Great Depression. In a time of severe budgetary restrictions, layaway was a valuable resource for those who couldn’t afford payment-in-full. Layaway allows an individual to put money down on an item, essentially putting it on hold, in order to make payments over time until the balance is paid in full. At that point, the item is theirs to take home.
For years, layaway was overshadowed by the advent of store credit cards, making a comeback in recent years. This holiday season, while you’re filling your sleigh with gifts and goodies, consider the pros and cons of these two payment options.
Store Credit Cards
In the 1980s and 1990s, stores began offering their own credit cards. The credit plans allowed consumers to overspend at will, while the stores charged interest on past due balances. Debt on department store charge accounts became one of the leading causes of financial trouble for Americans.
Pros
- Department store credit cards can be a good way to establish credit
- Unlike major credit cards, retail card requirements typically aren’t as restrictive
- Typically, store credit cards have lower credit limits and are easier to obtain than major credit cards
- Some stores offer points or rewards programs that can result in special savings, gift certificates, private sale access and other spending incentives
Cons
- The “buy now-pay later” philosophy encourages overspending and invites debt accumulation
- Interest rates for department credit cards are typically higher than for major credit cards
- Open lines of credit can affect credit history. Applying for more than two cards during a six- to 12 month period will be considered a risk factor on your credit report
Layaway
A layaway plan is an agreement between store and consumer. The customer makes an initial down payment, and then follows up with manageable payments over time. Meanwhile, the item is put aside until the consumer has paid in full. The latest recession, which hampered consumers’ ability to obtain credit, nurtured the return of layaway. Popular retailers like Toys R Us, Sears, Kmart, Burlington Coat Factory, T.J. Maxx and Marshalls are now offering new versions of old-fashioned layaway.
Pros
- Convenient and flexible, allowing a customer to make a series of small payments over time
- Encouraging responsible budgeting, layaway is a positive push in the opposite direction of contemporarily irresponsible consumer spending
- Layaway is an agreement between store and customer, and if the deal falls through, there won’t be any negative effect on an individual’s credit score
- Layaway fees often are much cheaper than interest paid on credit cards
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You can beat the holiday rush, shop before the stores get too crowded and avoid the chance that a must-have item will be sold out
- It can help impulsive buyers come to their senses and return items (minus fees)
Cons
- Some layaway fees can be high, with plan participation fees ranging from $5 to $100
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If the store has a set “price adjustment” limit on layaway items, and the item in question goes on sale, you may lose out on an opportunity for significant savings
- If the retailer goes out of business, you’ll likely lose whatever investment you’ve made
- Missing a payment could have serious consequences: You stand to lose all the payments you’ve already made