Layaway is Back, But Be Wary

Layaway is making a comeback as consumers try to avoid credit card debt. Major retailers such as Walmart, Sears, Toys R Us and Best Buy all have resurrected the payment plans as a way to lure cash-strapped holiday shoppers.

The program, which allows shoppers to pay for items over time without interest and then pick them up once they're paid in full, became popular in the 1930s but had all but vanished over the past few decades as the economy grew and credit cards became common.

"Over the past 15 years, consumers have been crazy for their credit cards and swiping the plastic any opportunity they had," says Andrea Woroch, a consumer and money-saving expert for Kinoli Inc., a family of money-saving shopping sites. "But with consumers leery of facing too much holiday debt, and threatening to spend less this year in stores, retailers have begun using layaway as a means of luring us back."

But before you dive in head first, make sure you know what you're getting into. Here are five little-known facts about layaway programs:

1. Service charges apply. There's paperwork, processing and labor involved in layaway plans, so stores charge a startup fee for each order. Most layaway origination fees are $5 or $10, but some stores, such as Best Buy, require a service fee that's 5 percent of the price of the item. Consider whether the amount of the service charge is worthwhile compared to the overall total of your purchase.

2. Mind-changing carries a penalty. If you put an item on layaway and later change your mind, you're likely to be charged a fee of roughly 25 percent to 30 percent of the total price of the layaway plan. "That's a hefty fine for changing your mind," Woroch says.

3. Deadlines matter. In most cases, if you don't pick up your item by the final date included in the layaway agreement, the layaway will automatically be cancelled. "You'll forfeit the service fee while incurring a cancellation fee," Woroch says. "But the money put toward the purchase will be refunded."

4. Credit cards can be cheaper. "As a financing option, layaway is decidedly worse than most credit cards," says Cornell professor Louis Hyman in this New York Times article. For example, the maximum layaway period at Walmart is two months. According to Hyman, a shopper who pays a $5 service charge and $10 down to buy $100 worth of Christmas gifts is in effect "paying $5 in interest for a $90 loan for two months: the equivalent of a credit card with a 44 percent annual percentage rate."

5. High-priced items work best. "Layaway is best for large-ticket items like TVs, appliances and furniture, when the interest incurred on a credit card would substantially surpass the service charge of $5 or $10," Woroch says. "On smaller purchases, it's best to pay with cash or put money away until you have enough to pay for it upfront."

Keep reading: 8 Tips for (Really) Frugal Living