Layaway programs have benefits, but pitfalls too

NEW YORK (AP) — Should savvy shoppers cheer the widespread return of layaway programs for the holidays?

Retailers are running advertising blitzes touting their layaway programs as the holiday shopping season kicks-off. And the resurgence of the old-fashioned purchasing method is generating buzz on social media sites and praise in personal finance blogs.

But paying a store to set aside merchandise while you slowly pay the balance, over a few weeks or months, may not be the best financial decision.

For starters, the fees associated with the programs can be more costly than credit card interest. Also, many programs lock in the item’s price at the time it’s put on layaway, that means shoppers may miss later sales. Plus, if good intentions lose out to poor planning and a payment is missed, shoppers may end up losing money when the layaway is canceled.

Proponents of layaway programs say they encourage families to set holiday budgets and avoid the January debt hangover.

But even strong supporters emphasize that before signing up, it’s important to make sure the program’s rules are clear, that you’re confident you’ll be able to make timely payments, and it’s part of a larger holiday spending plan.

“What you don’t want to do is commit to layaway, and then start making purchases with your heart, not your head, and start charging those,” said Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling. Do that and you’ll have to pay off the layaway and face charge card expenses after the holidays.

Here are some of the issues to consider before signing up for a layaway program:

— Fees

There’s no such thing as a free layaway.

Wal-Mart Stores Inc., for example, charges a $5 fee to enter its program, and requires a down payment of 10 percent of the purchase price. Sears and Kmart charge $5 for an 8-week payment plan and $10 for a 12-week plan; plus a down payment of $20 or 20 percent, whichever is greater.

Best Buy Inc.’s fee is 5 percent of the total price, and it only allows layaway on items totaling $250 or more. That’s a $25 charge for a $500 item. The electronics store also requires an initial down payment of 25 percent.

The fees may not sound high, but because of the short duration of layaway programs, they can exceed the interest charges on a credit card. If you pay a $5 layaway fee and $10 down payment on a $100 item held for eight weeks, for example, that’s the equivalent of 44 percent APR on a card.

And the shorter the layaway period, the higher the equivalent interest rate.

“It’s not really any different, at the end of the day, from using a credit card,” said Jacob Gibson, chief operating officer at Nerdwallet.com, a credit card comparison site. “Instead of paying interest, you’re going to pay fees.”

— Cancellation

Before committing to a layaway, make sure you can keep up with the payments.

If you skip a payment, many stores will cancel the layaway, and return the item to the shelves. They’ll return your balance, typically minus a $10 to $15 cancellation fee.

Some, like Sears and Kmart, both owned by Sears Holding Corp., allow for a 7-day grace period before the layaway deal is broken. But policies vary, so it’s important to make sure you know what can happen.

— Higher prices

If you sign up for an 8-week layaway plan this weekend, you’ll pay whatever the price the store is charging right now.

That could mean you’ll miss out on lower prices as the holidays near.

It’s important to understand whether items on layaway will qualify for future sales reductions. For the most part, stores will not reduce prices once the layaway has started, but it’s worth asking.

— Merchandise availability

For in-store purchases, most retailers will hold the exact item you place on layaway, but some rely on their inventory. This may particularly be an issue if the layaway arrangement was made online.

That could result in an item being out of stock when the balance it paid off. Check with the store to make sure that it is indeed “laying away” the item you’re paying for over time.

— Refunds

Refund and exchange issues are the number one complaint about layaway programs with the Better Business Bureau.

In general, layaway programs generate few complaints with the agency, but Katherine Hutt, a BBB spokeswoman, said the majority center mostly on merchandise return or refund policies.

Each store will have its own policy — and some may return only a sale price even if the item was full price under the layaway.

Consumers can check www.bbb.org to see if there are complaints about a particular store’s policy.

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