Layaway plan

What Is Layaway Plan?

A layaway plan is a retail purchasing method where a consumer makes a down payment on an item and then pays the remaining balance in installments over a period of time. The retailer holds the merchandise in reserve until the full purchase price is paid, at which point the customer takes possession of the item. This arrangement falls under the broader category of consumer finance, providing an alternative to traditional credit or immediate lump-sum payments. A layaway plan allows individuals to secure an item they desire without needing to pay the entire cost upfront, making it accessible for those who may have limited disposable income or prefer to avoid debt.

History and Origin

Layaway plans gained prominence in the United States after the Great Depression in the 1930s, emerging as a response to widespread financial hardship. During this era, consumers often lacked the immediate funds or access to credit needed for larger purchases. Layaway offered a practical solution, allowing individuals to make small, regular payments towards an item until it was fully paid for. The retailer would hold the merchandise, removing the risk of the item being sold to someone else.

These plans remained a popular purchasing option for decades, particularly for big-ticket items like furniture, appliances, and holiday gifts. However, their popularity began to wane in the 1980s with the widespread adoption and ease of access to credit cards. Credit cards offered consumers the immediate gratification of taking an item home at the point of sale, a convenience layaway could not match.

Despite their decline, layaway plans experienced a resurgence following the Great Recession of 2008, as consumers became more cautious about accumulating debt and some faced tightened credit access. More recently, the COVID-19 pandemic also saw a renewed interest in layaway and similar "buy now, pay later" (BNPL) schemes, as economic uncertainty led many to seek flexible payment options⁹. While traditional layaway involves the retailer holding the item, modern iterations, like BNPL, often allow the consumer to take the item home immediately while still paying in installments⁸. The Federal Trade Commission (FTC) provides consumer alerts and guidance regarding layaway plans, advising consumers to inquire about refund policies and terms⁶, ⁷.

Key Takeaways

• A layaway plan allows consumers to pay for merchandise in installments, with the retailer holding the item until full payment is received.
• These plans originated during the Great Depression, offering an alternative to credit for consumers with limited upfront funds.
• Unlike credit, layaway typically involves no interest charges, as the item is not released until paid in full.
• Layaway plans require a down payment and adherence to a scheduled payment plan, often with fees for cancellation or missed payments.
• The terms and conditions of a layaway plan can vary significantly between retailers, making clear disclosure by the seller essential.

Formula and Calculation

A layaway plan typically does not involve a complex formula with interest calculations, as the consumer does not take possession of the item until it is fully paid. Instead, the "calculation" revolves around a straightforward payment schedule.

The basic components are:

• Total Purchase Price (TPP): The full cost of the item.
• Initial Down Payment (DP): The upfront amount paid by the consumer to reserve the item.
• Number of Payments (N): The total number of installments the consumer will make.
• Payment Frequency (F): How often payments are made (e.g., weekly, bi-weekly, monthly).
• Installment Payment Amount (IPA): The amount of each regular payment.

The formula for the installment payment amount, assuming equal payments after the down payment, would be:

For example, if an item costs $500, a consumer makes a $50 down payment, and agrees to 9 equal weekly payments:

The consumer would make 9 weekly payments of $50 each after the initial down payment. The payment schedule is a critical element, clearly outlining the dates and amounts due to ensure the financial obligation is met within the agreed timeframe.

Interpreting the Layaway Plan

Interpreting a layaway plan involves understanding its practical implications for consumer budgeting and purchasing power. For consumers, a layaway plan can be seen as a forced savings plan for a specific item. Rather than saving money in a bank account and risking spending it elsewhere, the money is committed directly to the desired product. This can be particularly beneficial for individuals who struggle with immediate gratification or have difficulty saving large sums of money.

From the retailer's perspective, offering a layaway plan can expand their customer base to include those who may not qualify for traditional credit or prefer not to use it. It represents a form of pre-sale, securing a commitment from the customer without the immediate transfer of goods or the risks associated with offering credit. While the retailer holds the inventory, they also receive incremental payments, contributing to their cash flow over time. Key aspects to interpret include any service fees, cancellation policies, and the duration of the payment period, all of which impact the true cost and flexibility for the consumer. It's crucial for consumers to read the terms and conditions carefully before entering into a layaway agreement.

Hypothetical Example

Consider Maria, who wants to purchase a new television priced at $800. She doesn't have the full $800 immediately available and prefers not to use a credit card. A local electronics store offers a layaway plan with the following terms:

• Down Payment: 10% of the purchase price.
• Payment Period: 10 weeks.
• Service Fee: $5.
• Cancellation Fee: $20 (if the plan is cancelled before full payment).

Here's how Maria's layaway plan would work:

1. Initial Down Payment: Maria pays 10% of $800, which is $80. The store sets aside the television for her.
2. Remaining Balance: The balance remaining is $800 - $80 = $720.
3. Weekly Payments: Over 10 weeks, Maria needs to pay $720. Her weekly payment would be $720 / 10 = $72.
4. Total Paid: After 10 weeks, Maria will have paid $80 (down payment) + ($72 x 10) (weekly payments) = $80 + $720 = $800 for the television.
5. Service Fee: In addition to the $800, Maria pays the $5 service fee, making her total outlay $805.

Once the final payment is made, Maria can pick up her new television. If, at any point, Maria decides she can no longer afford the television, she could cancel the layaway plan, receiving her payments back minus the $20 cancellation fee. This structured approach helps Maria budget her personal finances to acquire the desired item without incurring interest charges often associated with consumer credit.

Practical Applications

While less prevalent than in their heyday, layaway plans still offer practical applications for both consumers and retailers. For consumers, especially those managing a tight budget or avoiding credit card debt, layaway can be a valuable tool for purchasing desired items without immediate financial strain. It's particularly useful for saving for larger purchases like electronics, furniture, or even holiday gifts, allowing individuals to secure an item at a specific price without incurring interest. Some service providers, like travel agencies, have also adopted a layaway-like model, allowing customers to book flights or vacations with installment payments, helping them manage travel expenses without accumulating debt before their trip⁵.

For retailers, offering a layaway plan can broaden their customer reach, especially to demographics with limited access to traditional credit or those who prefer to shop without it. It can also help move inventory, reduce the risk of returns compared to credit purchases, and foster customer loyalty. While the retailer holds the item, they benefit from a committed sale and a steady stream of payments. Consumer protection agencies, such as the Federal Trade Commission (FTC), provide guidelines and alerts for both consumers and businesses regarding layaway plans, emphasizing clear disclosure of terms and conditions to ensure fair practices⁴.

Limitations and Criticisms

Despite their advantages, layaway plans come with certain limitations and criticisms. A primary drawback for consumers is the inability to take immediate possession of the purchased item³. Unlike a credit card purchase, where the item is acquired instantly, layaway requires the consumer to wait until the full balance is paid, which can be weeks or even months. This delay can be inconvenient, especially for urgent needs.

Another criticism revolves around potential fees. While layaway plans typically don't charge interest, retailers may impose service fees, processing fees, or cancellation fees². If a consumer is unable to complete the payments, they may lose a portion of their initial payments due to these fees, or sometimes even the entire down payment, depending on the retailer's policy. This can be a financial risk, particularly for those in precarious economic situations.

Furthermore, the consumer does not benefit from any potential price drops on the item during the layaway period. If the item goes on sale after the layaway agreement is initiated, the consumer is still obligated to pay the original, higher price. Conversely, if the item's price increases, the consumer is protected from that increase. The absence of consumer protections and standardized regulations across all states in the U.S. can also be a limitation, as policies can vary significantly from one retailer to another¹.

Layaway Plan vs. Buy Now, Pay Later (BNPL)

Layaway plans and Buy Now, Pay Later (BNPL) services are both installment payment options for consumers, but they differ significantly in their mechanics and implications. The key distinction lies in the timing of possession of the merchandise.

Layaway plans are more akin to a structured prepayment system, where the retailer holds the inventory as security. The consumer makes a deposit, and the item is physically set aside. This traditional approach minimizes risk for the retailer, as they retain the product until full payment.

In contrast, BNPL services function more like short-term micro-loans. The consumer receives the item immediately, and a third-party BNPL provider often pays the retailer upfront. The consumer then repays the BNPL provider in installments, sometimes interest-free for a limited period, but often with significant late fees if payments are missed. This immediate gratification comes with the potential for consumers to accumulate debt more rapidly, and missed payments can negatively impact their credit history, unlike a traditional layaway plan.

FAQs

What types of items can typically be purchased on a layaway plan?

Common items purchased on a layaway plan often include higher-priced goods such as electronics, jewelry, furniture, and certain apparel, particularly during holiday seasons. The specific items available for layaway vary by retailer and their individual policies.

Are there any fees associated with layaway plans?

While layaway plans typically do not charge interest, many retailers may impose a non-refundable service fee, a setup fee, or a cancellation fee. It is crucial for consumers to inquire about all potential fees before entering into a layaway agreement. This ensures a clear understanding of the total cost of the purchase.

What happens if I miss a payment on a layaway plan?

The consequences of missing a payment on a layaway plan depend on the retailer's specific terms and conditions. Some retailers may charge a late fee, while others might cancel the layaway agreement, return the item to inventory, and refund previous payments minus any applicable cancellation fees or non-refundable deposits. Always review the contract carefully.

Can I cancel a layaway plan and get my money back?

In most cases, yes, you can cancel a layaway plan. However, retailers often have cancellation policies that may include a cancellation fee or a restocking fee, meaning you might not receive a full refund of all payments made. The remaining balance may be refunded as cash, store credit, or a check. It is essential to understand the refund policy before initiating a layaway plan to avoid unexpected losses.

How does layaway affect my credit score?

Generally, traditional layaway plans do not affect your credit score because they do not involve borrowing money or reporting payment activity to credit bureaus. The retailer retains possession of the item until it is fully paid. This distinguishes it from credit-based payment options like credit cards or Buy Now, Pay Later services, which can impact your credit history depending on your payment behavior.