An Alternative to Credit: Layaway

If you’ve been holiday shopping in the last few weeks, you may have noticed an increase in advertisements touting layaway– the practice of paying for merchandise in increments over a period of time and taking it home once payments are made.

Discount retailers such as Burlington Coat Factory, Marshalls, and TJ Maxx offer layaway as an option, and Kmart recently launched a national campaign promoting the practice. Sears also started a layaway program for the current holiday season.

“If you’re a retailer, it makes sense to promote layaway, especially during this economy, because a lot of people want to be able to buy when the selection is still good but not make purchases with credit,” says Ellen Davis, a spokesperson for the National Retail Federation.

With its roots in the Great Depression, many stores stopped offering layaway in the ’80s and ’90s as shoppers turned increasingly to credit cards to make purchases. Today, the practice is regaining popularity among some shoppers as credit tightens in the current economy. While layaway gives shoppers more leeway over purchases, is it a good deal for consumers?

For 36-year-old Kim Muhammad of Owings Mills, Maryland, the answer is yes. Having used layaway twice at TJ Maxx in the last couple of months, Muhammad says, “It’s better to have layaway than to go into debt with a credit card and wind up paying more for something than it originally cost in the first place.”

There are still pitfalls to avoid when going into a layaway agreement. Here’s how to make the most of a layaway program:

Stay on budget.
Layaway programs give you a way to buy items you don’t have the money for today, so it’s easy to tell yourself you can afford something when the money you’re using for payments could better be used to pay down debt or save.

Understand the terms. Make sure you know what’s expected of you. Be honest with yourself about whether you will be able to make the purchase in the allotted amount of time. If not, you could lose your merchandise, the service fee, the cancellation fee, and possibly your deposit.

Consider your use of credit. If you have no balance on your credit cards, layaway is not the most economical way to go. Charging an item and paying it off entirely when the bill is due means you’ll pay nothing extra for the purchase, while with layaway, you must pay a service fee. However, if you have a balance on your credit cards, layaway is likely a better option since service fees typically cost $5 to $10. Finance charges on an increasing credit card balance can cost you more over time.