What Is Layaway?
Layaway is a purchasing method in which a consumer places a deposit on an item to "lay it away" for later pick-up when they are financially positioned to pay off the balance. Layaway also lets customers make smaller payments on the product until the purchase is paid in full. A layaway plan ensures the consumer will get their chosen merchandise once it's fully paid.
- The term "layaway" refers to the retail purchasing method in which consumers place a deposit on items of merchandise—to "lay them away" for later pick-up at a time when they have the funds to pay the balance in full.
- Layaway programs are generally aimed towards shoppers with limited income who may struggle to pay for purchases in one lump sum.
- Created during the Great Depression of the 1930s, layaway programs declined during the 1980s, as the ubiquity of credit cards decreased their utility.
Layaway works for consumers who have limited disposable incomes and are unable to make larger lump-sum purchases. There is sometimes a fee associated since the seller must keep the item in storage until the payments are completed. With little risk involved for the seller, layaways can be readily offered to those with bad credit. If the transaction is not completed, the item is simply returned to the shelf. The customer's money may either be returned in full, forfeited entirely, or returned minus a fee.
Layaway programs also benefit retailers by allowing them to offer products to lower-income customers as a type of savings plan. Because the customer has already made a commitment to purchase the product on layaway, they cannot succumb to the temptation to spend that money elsewhere.
A Brief History of Layaway
The advent of layaway came during the Great Depression of the 1930s when most individuals and families were suffering greatly, financially. However, layaways then fell out of favor during the 1980s, as the ubiquity of credit cards decreased their utility. In September of 2006, Wal-Mart discontinued its layaway service in all its stores after 44 years, citing a decrease in demand and rising implementation costs.
However, in September of 2011, Wal-Mart resumed the service, due to new financial difficulties brought on by the Great Recession and subsequently increased consumer credit constraints. This was only brought back for the holiday season. Walmart still implements layaway to this day during the holiday season, and all year round for some items, like jewelry. They also charge a 20% APR.
Online layaway programs let consumers purchase items via scheduled deductions that are taken from a checking account. Online layaway simplifies layaway for both merchants and consumers by removing associated storage and bookkeeping costs.
Retailers often restrict layaway purchases to more expensive items, such as jewelry and electronic goods; smaller items like toys are typically unavailable for purchase through layaway programs.
The layaway items remain housed at the distribution center during the layaway period, rather than taking up valuable retail warehouse space. During the Christmas season, some individuals traditionally pay for other customers' layaway purchases, as a charitable gesture.
Layaways vs. Credit Cards
There are many similarities between layaways and credit cards, as well as many differences. Both layaways and credit cards are used to purchase an item that an individual cannot currently afford. Both have late payment fees as well as penalties for default. Both also allow for payment in installments over a certain time period.
One of the differences between the two is that with a credit card an individual can take home the item they purchased right away; with layaway, an individual can only take home an item once it has been fully paid for. Layaway requires a deposit whereas a credit card does not. And, depending on the layaway, you do not pay interest on the unpaid balance. With a credit card, you do, which can quickly increase the cost of a purchase and send individuals into credit card debt.
If you default on a layaway plan it will not impact your credit score whereas on a credit card it will. Also, you do not need good credit to use a layaway program but you do need good credit to receive a credit card or at least good terms on a credit card.
Credit cards are usually a better option if you can pay off your balance in full the next month and not accrue interest. Credit cards allow you to build a positive credit history, have rewards plans where you can earn points or cashback, and you receive your item right away. However, if you can't pay your balance in full the next month, layaway can be a better option to avoid accruing the high-interest debt associated with credit cards.