Plans can help with holiday budgeting, but beware the fees
By Susan Ladika
Just like the tinsel and
garland, layaway is being unpacked again for the holiday season, and a handful
of retailers are giving shoppers an early present -- waiving service fees for
purchases put on layaway.
While some experts say
layaway fulfills the Christmas wish of consumers who don't want to run up
credit card debt, others say "bah humbug" to the process.
Sears and Kmart, both
owned by Sears Holding Corp., and Toys R Us and Babies R Us, are hoping shoppers get into the holiday spirit early this year by
putting merchandise on layaway and allowing them to skip the $5 service fee.
Walmart is taking a slightly different approach -- requiring the $5 service fee
be paid upfront and then giving customers a $5 Walmart gift card when the
purchase is paid off. (See chart: 2012 layaway terms of major retailers.)
Layaway, which dates back
decades, before credit cards were ubiquitous, requires you to put a certain
amount down and then you pay a set amount every two weeks until the merchandise
is paid off.
"I love layaway. I think
it's a very useful tool," says Gail Cunningham, vice president of membership
and public relations at the National Foundation for Credit Counseling. "It
forces you to do more planning around spending."
Planning well in advance
can be of particular importance if you're the kind of consumer "who makes
financial decisions with your heart, not your head," Cunningham says. "It's
very easy to do when the malls are decorated and holiday music is playing."
Unlike using a credit
card to purchase your presents and then potentially letting the payments
stretch on for months, layaway has a narrow window for you to complete your payment,
Cunningham says.
Walmart, for example, launched layaway for the
2012 holiday season in mid-September, and all purchases must be completed by
Dec. 14.
In a statement, Kmart
said the decision to waive service fees at Sears and Kmart stores this fall reflects
"the budget concerns that come with the holiday season and (the company) wanted
to provide free layaway to help make holiday shopping less stressful."
But waiving the fees also
benefits the stores because "they're getting an early commitment from buyers," says
Rebecca Hamilton, an associate professor of marketing at the University of
Maryland. As customers make return trips to the store to pay on their accounts,
they may be tempted to buy more holiday goodies.
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Watch for layaway fees
While layaway can encourage thrift and budgeting, experts advise consumers to keep an eye on the fees, which on some purchases can be high enough to wipe out any savings.
In 2011, U.S.
Sen. Charles Schumer of New York issued a press release and sent a letter to
the National Retail Federation and the Retail Industry Leaders Association
complaining about exorbitant layaway fees. Along with fees for initiating a
layaway contract, many retailers also charge cancellation fees.
In the release, Schumer
says the fees "can exceed even the highest interest rates charged by credit card companies" -- equivalent to an 81 percent APR. He
urged stores to prominently post the interest rate equivalent of the fees they
charge. "Because stores refer to these charges as 'fees' instead of interest
rates, it is difficult for consumers to compare the effective cost of layaway
programs to the cost of using a credit card."
If retailers fail to act,
the senator threatened to ask the Federal Trade Commission to look into the
practice of charging hefty fees.
Louis Hyman, an
assistant professor at Cornell University and author of "Debtor Nation: The
History of America in Red Ink," says that while a $5 service fee may seem minor to
many, "It's actually very expensive as compared to a credit card."
As an example, he cites a
$100 layaway purchase made in October. If the consumer puts $10 down, pays a $5
service fee, and pays off the $90 balance within two months, it equates to a
credit card with a 44 percent APR.
For a consumer who
doesn't earn a lot, that $5 fee could be a heavy burden, Hyman says. And if
that consumer makes repeated purchases on layaway, the fees could quickly run
to $10 or $20. "Saving money under the mattress would be cheaper for them."
Hyman does concede
layaway could be a viable alternative if there's a major sale on a must-have
holiday gift, and the consumer doesn't have access to a credit card.
It's actually very expensive as compared to a credit card.
--
Louis Hyman
Author, 'Debtor Nation'
In its statement, Kmart said
all fees are fully disclosed before a consumer puts a purchase on layaway. "All
customers are aware of the minimal fees that result from a cancellation or
delinquent contract. There are no hidden fees."
Layaway also can serve a
psychological purpose, Hamilton says, because some consumers are fiercely
opposed to getting into debt.
If you're considering
purchasing something on layaway, it's important to understand the terms and
conditions, and check the reputation of the retailer.
In September, Ohio's
attorney general filed suit against the online layaway companies Layaway
Express and 123 Layaway for not delivering products to consumers and not
providing refunds. Consumers put down 10
percent of the purchase price, plus paid a $25 layaway fee, but in several
instances consumers said they never received their merchandise and their money
was not refunded.
Cunningham recommends
asking plenty of questions upfront, including:
Is there a discount if the merchandise you put
on layaway later goes on sale?
Are there fees if you later decide you don't
want the product?
If you put money down and change your mind, do
you get your money back?
What happens if you miss a payment?
The chart below illustrates the layaway terms of six of the largest retailers.
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