What is layaway? Could it be a good solution if you’re a holiday shopper on a tight budget? We’ll cover all the important details here—just in time for the quickly approaching gift-giving season.
Layaway: How it works
A layaway plan helps you make a purchase even if you don’t have the cash on hand today to cover the full amount. Many popular retailers offer layaway plans, including Toys"R"Us, Burlington, Kmart, Sears and Walmart.
Once you’ve picked out the item, you’ll generally put down a deposit and pay a service fee. After that, your item will be set aside in the store and you’ll make payments toward the remaining balance. Layaway plans come in varying lengths, depending on the store, and can range from a few weeks to several months. Once you’ve paid the full amount, you pick up the item.
Let’s say you want to purchase a doll house to give your niece this holiday season, but don’t want to plunk down the full $150 today. At this particular retailer, you’re required to make a 10% down payment to open the layaway plan plus pay a $10 service fee, so you’ll owe $25 the day you start the plan. If you opt for an 8-week layaway plan, you’ll make payments every two weeks online or in the store. After you’ve made all the payments, you can return to the store and pick up the doll house—and deliver it to one very happy niece.
Layaway—formerly considered an old-fashioned way to make purchases—is making a resurgence as shoppers look for ways to spread out holiday expenses over a longer period of time. The key benefits include:
- No interest: Unlike using credit cards, you won’t pay interest on the amount owed.
- No credit check: While some retailers might require you to present a photo ID, you credit won’t be checked because the store isn’t lending you money. If you stop making payments, the store will simply return the item to inventory and likely charge you a cancellation fee.
- Pay over time for big-ticket items: Broken into smaller payments, purchases that previously may have been too much of a strain on your budget could now be attainable.
Like all financial transactions, layaway isn’t without potential drawbacks. Here are a few to consider:
- Limited availability: Not all stores offer layaway programs, and those that do often have restrictions on which items are eligible. Additionally, some retailers only offer layaway plans during certain seasons.
- A long period of waiting and discipline: You’ll have to stay on top of payments before you can take the item home, which can be tricky during the busy holiday season—especially if you have to visit the store to make payments. (Some stores offer text and other payment reminders.)
- Fees and other charges: Service fees don’t count toward the purchase of your item, and you won’t get that money back if you stop making payments. Retailers might also charge a cancellation fee.
- Restricted refunds: If you must cancel a layaway plan partway through, some merchants will only offer you a refund via store gift card or store credit.
Alternatives to layaway
What if it’s too late for layaway? Maybe you need that gift in your hands within a few days or a week—meaning there’s not enough time to make layaway payments. Several alternatives are available, including:
- Interest free payment plans: Popular online and TV retailers HSN and QVC offer the option to make monthly debit or credit card payments to pay off your purchase. The key difference vs. layaway: Your item is shipped to you after the first payment instead of the last payment. These retailers might review your credit report, and if you use a credit card to make payments, you might end up paying interest.
- Credit cards: Another way to take the item home today and pay it off over time—but remember, if you don’t pay back the card’s full balance each month, you’ll be charged interest. Opening a credit card requires a credit check, and your payment history can impact your credit profile: Missing payments can harm it, while making them can improve it.
- Personal installment loans: With an installment loan, you’ll receive a lump sum of money up front then pay it back with interest over a specified period of time, usually a few months to a few years. Like a credit card, taking out an installment loan requires a credit check, and your payment history impacts your credit profile.
If you’re working to build better money habits this holiday season, RISE is here to help. Check out our free, interactive tools for budgeting, setting savings goals and managing debt. You can also visit MyMoney.gov for more useful financial resources.