What Is Layaway?
Layaway is a retail purchasing agreement where a consumer makes a down payment on merchandise and then makes a series of scheduled payments over time until the full purchase price is paid. Unlike traditional immediate purchase methods, the item remains with the seller until the final payment is made. Layaway falls under the broader category of consumer finance, offering an alternative for individuals to acquire goods without incurring debt or interest charges, which are typically associated with credit-based transactions.
History and Origin
Layaway plans gained significant traction during periods of economic hardship, providing a crucial mechanism for consumers to purchase goods when immediate funds or access to credit were limited. The concept saw a notable increase in popularity in the United States during the Great Depression. As cash became scarce and unemployment rose, layaway offered a way for individuals to budget for necessary items or even small luxuries by paying in installments. This allowed consumers to continue spending, albeit slowly, without the need for immediate payment in full. Although layaway largely faded from prominence with the widespread adoption of credit card use starting in the 1980s, which offered instant gratification, it experienced a resurgence during and after the 2008 financial crisis as consumers sought to avoid debt and interest.5,4
Key Takeaways
- Layaway allows consumers to reserve merchandise by making a deposit and subsequent periodic payments.
- The purchased item remains with the retailer until the full price is paid.
- Unlike credit, layaway typically does not involve interest charges but may include service fees.
- Layaway is often used by individuals who prefer to avoid credit or do not qualify for traditional credit options.
- Cancellation policies vary by retailer and may result in lost deposits or fees.
Interpreting Layaway
Layaway plans serve as a structured approach to consumer spending, enabling individuals to acquire desired items through a series of planned contributions. From a consumer perspective, interpreting layaway involves understanding the commitment to a payment schedule and the deferral of immediate possession. It is often seen as a practical tool for budgeting for significant purchases, especially around events like holidays, by spreading the financial outlay over time. For retailers, offering layaway can expand their customer base to those who might not have immediate liquidity or access to credit, thereby increasing sales. When considering a layaway agreement, consumers should carefully review the specified payment terms, including the duration of the plan, required payment frequency, and any associated fees.
Hypothetical Example
Consider Sarah, who wishes to purchase a new television priced at $500. She visits a department store offering a layaway plan. The store requires a 10% down payment and allows customers to pay the remaining balance over 90 days with bi-weekly installments. The store also charges a $5 non-refundable service fee.
- Initial Payment: Sarah pays a $50 down payment (10% of $500) plus the $5 service fee, totaling $55.
- Remaining Balance: The outstanding balance is $450 ($500 - $50).
- Installments: Over 90 days (approximately 12 weeks, or 6 bi-weekly periods), Sarah needs to make 6 payments of $75 each ($450 / 6).
- Possession: Once Sarah completes all six $75 payments, she will have paid the full $500 for the television and can take it home. If for any reason Sarah decides to cancel the layaway, the store's refund policy would dictate how much, if any, of her payments are returned, often after deducting cancellation or restocking fees.
Practical Applications
Layaway plans find practical application primarily in consumer finance, serving as an alternative payment method for goods that consumers wish to purchase but cannot pay for outright at the moment. This can be particularly useful for managing household budgeting for larger discretionary purchases, such as electronics, furniture, or holiday gifts, without incurring interest charges associated with credit products. Retailers use layaway programs to attract customers who are hesitant to use credit or prefer to save up for an item rather than finance it. For example, during the holiday shopping season, layaway can help consumers spread out the cost of gifts over several weeks or months, ensuring items are secured before they sell out, without immediately depleting their cash flow. This approach can be a strategic way to manage holiday spending and avoid post-holiday debt accumulation.3
Limitations and Criticisms
While layaway offers certain benefits, it also comes with limitations and criticisms. One primary drawback is the delayed gratification, as consumers cannot take possession of the item until it is fully paid for. This contrasts sharply with immediate purchase options using cash or credit card. Additionally, many layaway plans come with associated transaction costs, such as non-refundable service fees or cancellation fees, which can erode the value proposition, especially for lower-priced items. If a consumer fails to make payments according to the agreed-upon schedule or decides to cancel the purchase, they may forfeit their initial deposit and any service fees paid. Some retailers might also impose restocking fees or only offer store credit instead of a cash refund for canceled layaway agreements. Furthermore, layaway plans typically have stringent payment terms and specific deadlines, and failure to meet these can result in the loss of the reserved item and previously made payments.2
Layaway vs. Credit Card
Layaway and credit card purchases both allow consumers to acquire items without immediate full payment, but they differ fundamentally in how they function and their financial implications. With layaway, the consumer does not take possession of the item until the entire balance is paid; essentially, it is a way to save for a purchase at the store. Layaway typically does not involve interest charges, nor does it affect one's credit score since no credit is extended. Conversely, a credit card allows immediate possession of the item, but the purchase is made on borrowed funds. This means consumers accrue interest if the balance is not paid in full by the due date, and repayment behavior directly impacts their credit score. While layaway helps consumers avoid debt, credit cards offer convenience and can help build a credit history if managed responsibly.
FAQs
Q1: Are layaway plans regulated?
A1: While no federal law specifically governs all aspects of layaway transactions, the Federal Trade Commission (FTC) requires retailers to disclose all important terms and conditions, including cancellation and refund policy, payment plans, and any service charges. Many states also have their own consumer protection laws that apply to layaway agreements.1
Q2: Can I get my money back if I cancel a layaway?
A2: It depends on the retailer's specific payment terms and cancellation policy. Some stores may offer a full refund, while others might charge a cancellation fee, deduct a restocking fee, or provide only store credit for the payments made. It is crucial to understand these terms before entering into a layaway agreement.
Q3: Does layaway affect my credit score?
A3: No, layaway plans typically do not affect your credit score because they do not involve borrowing money or extending credit. The retailer holds the item until it is fully paid, so there's no credit risk for them in the traditional sense that would warrant reporting to credit bureaus.