Tuesday, November 15, 2011

Is Layaway a good idea?

“The man who never has money enough to pay his debts has too much of something else.”
-James Lendall Basford
This year Sears, Kmart, Toys “R” Us, Babies “R” Us, TJ Maxx, Marshall’s, and Burlington Coat Factory are offering layaway plans. What exactly is layaway?

If you can not afford the full price for an item but don't want to see it sold out and unavailable closer to Christmas you pay the store part of the price and agree to pay in installments. There is an initial deposit based on a percentage of the purchase price (perhaps 10-20%) and a service fee (say $5-10) to administer the plan and keep the item in storage for you to pickup later. There are no interest payments but you don’t get to take the merchandise home until you’ve paid for it in full.

Most stores offer 30 to 90 days for you to make all payments. Some require payments every week or two to keep the item in storage. If you miss a payment the item might be put back on the shelf; some stores will give a refund of partial payments (minus cancellation fee) but others will only give you a gift card of money paid. Some stores will honor a sale price after an item has been put on layaway - others have limited time windows for honoring sale prices (eg 7-30 days).

Bottom Line

It's important to ask for and read the complete terms and conditions of a store's layaway plan before using layaway. You might be in for a nasty surprise if you change your mind or the item goes to 1/2 off two weeks later.

Unless the item is really expensive you're better off using a credit card than layaway. Consider the Rock n' Roll Elmo doll for $25 at Toys "R" Us. The layaway fee is $5. Say you have 90 days to pay in full. The $5 can be thought of as a loan with 20% interest for 90-days. (5/25 = 20%).  This is equivalent to an annual loan rate of 107% APR. By law credit cards are maxed at 30% APR. If you used a credit card for Elmo and paid it one year later, the interest would be 25 * .3 = $7.50 which is higher than $5 but you also had 4 times as long to pay it.

Better yet, don't buy a toy if you cannot afford it. An estimated 13.5 million Americans are carrying debt leftover from last Christmas. Go simple. Give a gift with love instead of a gift with batteries. Make something or give a gift of time like a free message or painting a room.

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