Layaway: The New Credit Card?

Remember layaways?

Neither do we. Mostly because their biggest boom was during the Great Depression. But thanks to the credit crunch, the layaway has been resurrected, reports today’s WSJ.

A layaway lets a customer put a purchase aside without having to pay for it in full upfront. Dying for that Robopanda but not ready to shell out $199.99 to Kmart right now? No problem. Kmart will hold onto one for you! But there is a catch:

Layaway plans aren’t free — most stores charge a fee for setting aside the merchandise, and ask for a down payment. Kmart requires customers to pay a $5 service fee and a $10 cancellation fee upfront, or put down 10% of the item’s cost, whichever is greater. Customers must make biweekly payments over eight weeks to pay the balance. In case of default, the item goes back into stock and the customer receives a refund, minus the $15.

Some other companies, like TJ Maxx, Marshalls and Burlington Coat Factory, are offering similar layaway plans this season as well. (Wal-Mart axed their layaway plan in 2006.) Sites like eLayaway.com have sprung up, luring consumers with iPod Touches for “as low as $42.23 a month.”

In a perfect world, people would only spend money they actually have on holiday goods. But we’re realists and understand the appeal of the layaway. Compared to the typically sky-high interest rates on credit cards, this might actually be a better alternative if you’re in a pinch.

Keep in mind that the store — not a bank or credit card issuer — sets the rules here. If you miss a payment, you still don’t have the item (since they’re laying it away until you pay in full), and you won’t get all of your money back. They’re not going to negotiate a payment plan with you like a credit card company might. (Not that those guys have been super-flexible lately, either.)

Some stores that offer layaways allow you to charge the payments to your credit card, which doesn’t make much sense: Not only are you racking up layaway fees, but you’re also incurring potentially high interest rates from your credit card. Not a good move.

Before you sign up to lay away, ask yourself a few questions: Do you really need that robotic bear (or whatever)? Can you hold off and pay in full later? What will those payments will look like once the holiday hullabaloo has died down?

source : http://blogs.wsj.com