Layaway Explained: How It Works, Examples, Pros and Cons
Summary:
Layaway is a payment plan where consumers pay for an item in installments before taking it home. It’s a great option for those with limited income or poor credit. While layaway plans lost popularity due to credit cards and Buy Now, Pay Later (BNPL) programs, some retailers still offer them today. Understanding layaway options, comparing them to credit cards, and learning about their benefits and drawbacks can help shoppers make informed purchasing decisions.
Layaway is a purchasing method where consumers place a deposit on an item, allowing the retailer to hold the item until the balance is paid in full. It’s a simple and effective way for individuals to afford larger purchases without using credit cards or incurring debt. Though the popularity of layaway plans has fluctuated over the years, many shoppers still use this method to manage their spending.
What is layaway?
Layaway is a purchasing arrangement where a buyer places a small deposit on an item they wish to purchase. The retailer holds the item in reserve, and the buyer pays off the balance over time in installments. Once the full payment is made, the buyer can take the item home. This method is ideal for consumers who don’t want to rely on credit cards or who may not have access to credit.
Layaway programs usually come with terms and conditions. These may include down payments, installment schedules, and fees for cancellation. Unlike credit cards or Buy Now, Pay Later (BNPL) programs, layaway generally doesn’t charge interest on the outstanding balance, making it a safer choice for budget-conscious shoppers.
History of layaway
Layaway plans originated during the Great Depression in the 1930s when financial hardship was widespread. Retailers developed layaway as a solution for customers who needed a way to purchase items over time, without the burden of interest. Layaway became a popular payment method through the mid-20th century, especially for large, expensive purchases such as furniture, electronics, and holiday gifts.
However, by the 1980s, the introduction of credit cards began to eclipse layaway programs. Credit cards allowed consumers to take home products immediately and pay off their balance later. Retailers began discontinuing layaway programs, seeing credit as a more efficient payment option.
Despite its decline, layaway saw a resurgence during the 2008 Great Recession when consumers became more cautious about credit. In response, retailers like Walmart reintroduced layaway services for a limited time, particularly around the holiday season.
How does layaway work?
A layaway plan typically involves the following steps:
1. Choose your item
The consumer selects the item they want to purchase and places it on layaway. The item is then set aside by the retailer, ensuring that it won’t be sold to another customer.
2. Make a down payment
The buyer is required to make an initial down payment, which is a percentage of the total cost. This deposit holds the item in reserve for the customer.
3. Pay in installments
The consumer makes regular payments over an agreed-upon period. Payments can be weekly, bi-weekly, or monthly depending on the retailer’s terms. Layaway plans typically last anywhere from 30 to 90 days.
4. Collect the item
Once the balance is paid in full, the buyer can collect their item from the store. If the consumer fails to complete the payments, the retailer may return the item to the shelf, and the customer may forfeit any payments made, minus a cancellation fee.
5. Cancellation
Most retailers allow buyers to cancel their layaway plans, though they typically charge a cancellation fee. Some stores refund the customer’s payments in store credit, while others offer partial refunds.
Online layaway
With the growth of e-commerce, many retailers now offer online layaway programs. These plans are similar to traditional in-store layaway but with the convenience of managing payments online. Online layaway allows consumers to reserve items by making a down payment and paying the balance through scheduled electronic deductions from their checking account.
Online layaway is particularly beneficial for retailers, as they don’t need to store the reserved item in a physical location. Instead, the item remains in the distribution center until it is paid for in full and shipped to the customer. This setup reduces storage costs for the retailer while offering the same flexible payment options to the buyer.
Layaway vs. Buy Now, Pay Later (BNPL)
In recent years, Buy Now, Pay Later (BNPL) programs have gained popularity. BNPL allows consumers to take home their purchases immediately and pay the cost in installments, similar to layaway. However, there are some key differences between the two.
Ownership of the item
With BNPL, consumers take the item home right away, even if they haven’t fully paid for it. With layaway, the item remains with the retailer until the balance is fully paid.
Interest and fees
BNPL programs may charge interest, particularly if payments are not made on time. Many layaway plans, on the other hand, don’t involve interest, though there may be small service or cancellation fees.
Credit impact
Missed BNPL payments can affect a consumer’s credit score. Layaway does not typically involve a credit check, and missed payments or cancellations don’t harm credit scores.
Layaway vs. credit cards
Credit cards are often seen as an alternative to layaway, especially for consumers who can afford to pay off their balance quickly. However, there are significant differences between the two.
Immediate ownership
With a credit card, consumers can take home the item immediately and pay off the balance over time. Layaway requires customers to complete their payments before they can take the item home.
Interest rates
Credit cards usually charge interest on unpaid balances, which can quickly increase the total cost of an item. Layaway programs generally don’t charge interest, making it a safer option for budget-conscious shoppers.
Credit score impact
Using a credit card can help build a positive credit history if payments are made on time. However, missed payments can hurt a consumer’s credit score. Layaway programs don’t affect a person’s credit score, making them accessible to those with poor credit or no credit history.
Comprehensive examples of layaway programs
Many well-known retailers have either offered or currently offer layaway programs tailored to specific types of purchases. Below are examples from diverse industries to illustrate how layaway plans work across different retail sectors.
1. Walmart layaway program (discontinued)
Until recently, Walmart was one of the most prominent retailers to offer layaway. Their layaway plan typically operated around the holiday season. Customers could place items such as toys, electronics, and home appliances on layaway with a down payment of 10% or $10, whichever was greater. The payments could be made in installments until the balance was paid off, at which point the item could be taken home.
For example, if a customer wanted to purchase a $400 TV on layaway, they would place a down payment of $40, leaving a balance of $360. The customer would then make regular payments over 60 days, depending on the store’s terms. If they missed a payment, Walmart would charge a cancellation fee and return the TV to inventory.
Walmart discontinued its layaway program in 2021 and replaced it with a Buy Now, Pay Later option through a third-party lender, Affirm. However, this is a useful historical example of how a major retailer structured its layaway program.
2. Kmart’s flexible layaway
Kmart, one of the few retailers still offering layaway, provides both in-store and online options. The program allows customers to choose an 8-week or 12-week layaway period, depending on the total purchase price. For purchases over $300, the 12-week option becomes available. Kmart’s layaway plan requires a $10 down payment and includes non-refundable service fees, such as $5 for the 8-week plan or $10 for the 12-week plan.
For example, a family wanting to buy $600 worth of holiday gifts can use Kmart’s layaway plan. They would pay $60 as the initial deposit and then make bi-weekly payments until the total balance was settled. If they canceled the plan, they’d be charged a cancellation fee but would get the rest of their payments refunded as store credit. This plan is particularly useful for large, seasonal purchases when consumers prefer to budget over a few months.
3. Burlington Coat Factory’s 30-day layaway
Burlington Coat Factory offers a shorter layaway plan compared to other retailers. Customers can place items on layaway for up to 30 days with a down payment of $10 or 20%, whichever is greater. They also charge a non-refundable $5 service fee, and all payments must be completed in-store. If the customer decides to cancel the layaway, there is a $10 cancellation fee.
For instance, a shopper wanting to purchase $200 worth of clothing and accessories at Burlington would pay a $40 down payment. They would then have 30 days to pay the remaining $160. If they fail to complete the payment, the item is returned to the shelf, and they may lose part of their deposit.
These examples showcase the diversity in how layaway programs are structured, with varying timeframes, fees, and eligible products across retailers. Whether a consumer is looking for holiday gifts, furniture, or clothing, layaway plans provide an alternative to credit-based purchasing.
Layaway and financial management
In addition to being a convenient payment method, layaway can also serve as a tool for better financial management. For shoppers, layaway encourages disciplined spending habits by spreading out payments over time rather than making impulsive purchases.
Budgeting benefits
Layaway helps consumers plan their spending by allowing them to allocate funds over several weeks or months. Instead of making a single, large payment that could strain their budget, they can split the total cost into smaller, manageable chunks. This is particularly helpful for low-income families or individuals who need to save up for essential items like winter coats, school supplies, or holiday gifts.
For example, a customer could use layaway to purchase school supplies ahead of the academic year. By spreading out the cost of backpacks, shoes, and stationery over several weeks, the shopper can plan their budget and ensure they don’t overspend in a single month. Layaway acts as a savings tool in this regard, helping consumers avoid debt while still acquiring the products they need.
Setting financial goals
Layaway can also aid in setting and achieving financial goals. Because layaway involves regular payments, it allows customers to stay on track toward their purchasing objectives. This method can be especially useful during periods like the holiday season, where higher-than-usual spending is required. By using layaway to spread out costs, shoppers can enjoy their holidays without falling into debt.
A family might choose to put their holiday gifts on layaway during September or October, giving themselves a few months to gradually pay off their purchases. By December, they’ve paid for everything in full and don’t need to worry about a large lump sum payment or credit card bills at the start of the new year. Layaway, in this sense, promotes a sense of financial responsibility.
Layaway in today’s retail landscape
Although layaway has seen declines due to the rise of credit cards and Buy Now, Pay Later (BNPL) options, it still holds a place in today’s retail environment. Layaway programs cater to specific types of customers and offer advantages that BNPL or credit cards may not.
Shoppers with poor credit
One of the significant benefits of layaway is that it doesn’t require a credit check. Unlike BNPL services or credit cards, layaway is accessible to customers who might have a poor credit history or no credit at all. This makes it a valuable option for individuals who may be unable to qualify for a traditional line of credit but still need a way to afford larger purchases.
A young adult with limited credit history, for instance, might want to purchase a new laptop for college. While they may not qualify for a credit card or a BNPL program with favorable terms, they can use layaway to reserve the laptop and pay for it in installments without worrying about accruing debt or harming their credit score.
Seasonal layaway offers
Many retailers offer layaway programs specifically during high-demand periods, such as the back-to-school season or the holidays. These seasonal layaway programs allow consumers to reserve popular or high-ticket items, ensuring they don’t miss out during periods of high shopping activity.
For example, during the holiday season, stores like Marshalls and Walmart (before discontinuing their program) often launched special layaway promotions for toys and electronics. These promotions catered to parents who wanted to ensure they had the perfect gifts for their children, without the financial strain of last-minute purchases.
The resurgence of seasonal layaway highlights its continued relevance in helping shoppers manage peak spending periods. Retailers benefit by securing sales in advance, while customers gain peace of mind knowing their desired items are set aside.
Conclusion
Layaway plans provide a flexible and interest-free way for consumers to manage their finances while purchasing large-ticket items. Although layaway may not be as widely available as it once was, it remains a viable option for individuals who prefer not to use credit or for those with limited access to credit. Understanding how layaway works, its benefits, and its drawbacks can help consumers make informed choices that fit their financial situation. Whether you choose layaway or another payment method like BNPL or credit cards, it’s important to weigh the pros and cons before making a purchase.
Frequently asked questions
How long do layaway plans last?
Layaway plans typically last between 30 and 90 days, depending on the retailer. Some stores may offer longer terms for larger purchases, such as furniture or electronics.
Can I cancel a layaway plan?
Yes, most layaway plans allow for cancellation. However, retailers may charge a cancellation fee, and any deposits or payments may be refunded as store credit rather than cash.
Is layaway available for online purchases?
Many retailers now offer online layaway programs, allowing consumers to make payments electronically and manage their plans without visiting a physical store.
Does layaway affect my credit score?
No, layaway does not impact your credit score. There is no credit check involved, and missed payments or cancellations won’t affect your credit history.
Key takeaways
- Layaway allows consumers to pay for an item in installments before taking it home, without the need for credit.
- Layaway plans typically don’t involve interest charges, making them a cost-effective payment option.
- Consumers must complete their payments before they can take possession of their purchase.
- Layaway programs are available to individuals with poor credit and do not affect credit scores.
- Many retailers no longer offer layaway programs, with some only offering it seasonally.
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