Layaway is a method of purchasing retail merchandise that enables shoppers to put an item on reserve and make payments on it until it is paid in full. Merchants invented layaway during the Great Depression, a time when many shoppers had little money available to make full purchases. In 2011, layaway plans became popular once again as a way for struggling retailers to entice more customers to shop. Wal-Mart decided to re-instate the layaway plan in late 2011. But do layaway plans benefit customers or are they just another way for companies to boost their bottom lines? The answer may lie in the middle, as layaways can be beneficial for both parties. Read on to find out how.

SEE: Should You Use Layaway?

The Benefits of Layaway
Layaway enables shoppers to make a purchase even if they don't have the full amount of money needed to pay for the items they want. By putting down a small deposit, the item is held for a period of time, which varies from retailer to retailer, although 60 days is a fairly common period. Many retailers extend that period during peak holiday shopping season, providing an opportunity to make sure the most popular holiday gifts will be ready and waiting months down the road when they are needed.

Once an item has been put on layaway, the buyer makes regular periodic payments, taking the item home only after it has been paid for in full. Unlike credit cards, layaway programs neither charge interest, nor do they require a good credit score in order to participate.

The Downside
While layaway plans are convenient and affordable, they are not always free. Many stores charge a nominal fee when items are put on layaway, and may charge a fee if the buyer misses a payment or fails to pay off the merchandise. Some stores let buyers make the payments with a credit card - which isn't in always in the buyer's best interest, particularly if a layaway fee also applies. The credit card interest and the layaway fee will make the item significantly more expensive than if the item were just paid for in full upon purchase.

Layaway programs also come with some limitations and challenges. Certain items, such as computers, food and liquids may not be available through layaway plans. In addition, the store offering the layaway plan could go bankrupt, leaving plan participants in a difficult position if they cannot afford to pay off their purchases immediately.

Credit Cards Change the Landscape
Layaway programs were popular for more than half a century, from the Great Depression through the 1980s. During the late-1980s, many retailers discontinued their layaway programs in light of the evolution of a consumer-crazy culture addicted to credit cards and instant gratification. Because consumers didn't want to wait until their purchases were paid for in order to take their purchases home, and the cost to stores to handle money and store the merchandise, many stores eliminated layaway plans and upped their profit margins by promoting store-branded credit cards instead.

Today, it's hard to imagine a time when buying on credit wasn't an option. Yet, credit cards are a fairly recent invention. Diners Club was actually the first credit card, created in 1950.

SEE: Credit Cards: Birth Of A Plastic Empire

Lessons From Layaway
While layaway never totally disappeared, it was largely forgotten during the free-spending decades of the 1980s and '90s, when many companies ended the practice to save costs on a program few were using.

The credit crisis of 2008 resulted in a resurgence of layaway. In a modern twist, some online retailers even began to specialize in layaway buying. In addition to convenience and the ability to buy coveted items, layaway plans also offer a variety of financial lessons that prudent investors can apply to other aspects of their savings and investment plans and strategies.

  1. Layaway plans embody the lesson that shoppers shouldn't expect to take merchandise home if they can't afford to pay for it. Instant gratification can lead to financial problems, as the urge to shop surpasses the ability to pay, and monthly credit card statements make it easy to forget the daily charges that continue to add up from buying on credit.

  2. Layaway plans highlight the value of good budgeting skills, as regular, timely payments must be made in order to acquire the desired merchandise.

  3. Layaway plans emphasize the need to pay attention to fees. Reading the fine print to understand the terms and conditions of a purchase is critical to making the most of layaway plans, just as it is to making wise investment decisions.

In both good times and bad, layaway plans are tools that can help consumers get the gifts and goods that they want without getting themselves into debt. They are also a reminder that the old-school purchasing strategy that kept our great-grandparents out of debt works just as well today as is it did decades ago.

SEE: Budgeting Basics

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