Layaway: Worse Than Using a Credit Card?

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There are reasons that layaway went away. As more Americans gained access to credit, most stores got rid of layaway plans, which allow customers to pay off big purchases over the course of a few weeks or months. Stores preferred shoppers to use plastic because the swiping of a credit card was much simpler than administering layaway payment plans, and also because consumers are likely to buy more when paying with credit. Now, though, layaway is coming back in a big way.

Walmart killed off its layaway option in 2006. Soon thereafter, many of the retail giant’s shoppers pleaded with the company to bring layaway back. (One Walmart fan even made a rap video lamenting the loss of layaway at its stores.) Last month, however, Walmart announced the return of layaway for the upcoming winter holiday shopping season. The world’s biggest retailer joins Sears, Toys R Us, TJ Maxx, and Best Buy in a growing list of stores now offering layaway.

Many shoppers—particularly those who don’t have credit cards, or who are just scared of getting into debt by using credit cards—embrace the return of layaway. But does buying on a payment plan make financial sense?

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Nope. Not even a little bit, says Cornell professor Louis Hyman in a New York Times op-ed. Hyman writes that a typical shopper would wind up paying far less interest by using a credit card—even one with a relatively high APR—than layaway.

Hyman gives the example of a mom who buys $100 worth of toys on layaway at Walmart. A $10 down payment is required, as is a $5 service fee. Then …

Over the next two months she pays off the rest. In effect, she is paying $5 in interest for a $90 loan for two months: the equivalent of a credit card with a 44 percent annual percentage rate, a level most of us would consider predatory.

That scenario is better than one in which the mom fails to pay off the balance, and then loses the $10 down payment as well as the service fee. In effect, she would be giving Walmart $15 and getting nothing in return.

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Hyman suggests that the mom would have been better off paying for the merchandise with a credit card. And if the mom managed to pay off the bill within a couple months, then sure, that’s the smarter option. That’s a pretty big “if,” though.

If, on the other hand, the mom swiped a credit card for that $100 worth of toys, and then, because she hadn’t gone over her credit limit and spotted a few other items she just had to have, she wound up spending $250 more during the card’s billing cycle, and then she couldn’t come close to paying off the balance for months, then … you see where this is going. Around this time last year, there were 13.6 million consumers still paying off debt incurred from the previous Christmas season’s shopping splurges.

For certain types of shoppers, layaway is the wiser option compared to credit cards. Even if the mom is paying more interest and fees than are necessary, the risks of running up substantial debt through layaway are minimal to nonexistent.

If you are considering layaway, take a close look at the fine print of the retailer’s payment plan. The Better Business Bureau offers a list of questions to ask before buying anything on layaway, including:

• How much time do I have to pay off the item?

• When are the payments due?

• How much do I have to put down?

• Are there any storage or service plan fees?

• What happens if I miss a payment? Are there penalties? Does the item return to inventory?

• Can I get a refund or store credit if I no longer want the item after making a few payments?

• What happens if the item goes on sale after I’ve put it on layaway?

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One more question before utilizing layaway or credit cards to pay for holiday purchases: Ask yourself why the even more old-fashioned method—saving up money in a cookie jar or savings account and paying cash on the spot and in full—isn’t feasible. If you’re concerned with spending more than you can afford, paying with cash is the best option of all.

Brad Tuttle is a reporter at TIME. Find him on Twitter at @bradrtuttle. You can also continue the discussion on TIME’s Facebook page and on Twitter at @TIME.