Back to the future with layaway plans

Once upon a time, department and discount stores routinely allowed shoppers to set aside money in special accounts so they could save up for big-ticket goods like televisions and furniture. Once you socked away enough cash, the item was yours.

For those too young to remember, these programs were called “layaway” plans, and they were great because they instilled discipline – you couldn’t have what you couldn’t afford. Simple concept, right?  Customers paid a percentage of the purchase price as a down payment and then spread the balance over several months.

When consumer credit became more readily available – for better or worse – it marked the beginning of the end of the layaway, and most stores gradually did away with the practice. Wal-Mart, for instance, eliminated its program last year. Forced savings over time simply couldn’t compete with instant-gratification credit, though we’d probably all be better off in these unsettling times if we had continued to follow that basic principle.

But one notable chain stuck with the layaway and is actively promoting it this holiday season ...

That firm is Kmart. With 1,400 stores nationwide, the Chicago-based discount chain says it’s the only remaining national retailer that still offers a layaway plan. Susan Erlich, head of financial services for Kmart, says the company wants to help its customers stick to a shopping budget and avoid piling up credit-card debt. We applaud that. And last year, 3.2 million Kmart customers bought merchandise on layaway.

Here’s how it works:

It costs $5 to set up a layaway account at Kmart, and you have eight weeks to pay off the total. When you open the account, Kmart takes the item off the store floor so no one else can buy it. If payments are more than a week late, your merchandise is returned to the sales floor, and you’re entitled to a refund, minus a cancellation fee of around 10 percent.

Not all products are eligible for layaway purchase, including alcohol, cigarettes, food, and personal computers. And if you’re planning a holiday layaway purchase of electronics equipment priced at more than $200, you only have until Nov. 15 to open an account.

If you’re intrigued by the layaway concept, but do most of your shopping online, here’s a tip. Try using eLayaway. eLayaway isn’t a merchant, but a payment method, just as Visa, Paypal, and American Express are. When you check out from any participating e-tailer, you simply click the eLayaway option. The company has partnered with more than 1,000 Web retailers, including the Gap, Adidas, Bass and Pro Shops, that allows users to shop and pay over time through regular, automatic deductions from their checking account, with delivery upon full payment.

As with any layaway plan, there are no interest charges. Buyers pay a flat 1.9 percent transaction fee. If you cancel your purchase, you’ll get all your money back minus a $25 penalty.

How could they make these plans better? One way would be to offer consumers interest on the money they salt away. After all, they’re holding your money – so why shouldn’t they pay you interest, even if it’s a small percentage? We haven’t seen any plans like that, but let me know if you have at tightwad at cro dot consumer dot org.

Comments

[Cathy]

Layaway programs went by the wayside not only due to the onset of credit cards but they created a time consuming separate accounting procedure. In addition, their products could set around for two months before they received payment or cash for their products. The cash waiting period put pressure on the stores cash flow. If you recall KMART filed bankruptcy a few years back as they ran out of cash.

TOD REPLIES: Agreed. They're a bad deal, technically, since your money is just sitting there earning nothing. But for anyone struggling with too much credit debt, they sure keep you from spending beyond your means.

[Dennis DiVito]

Why should the retailers credit you interest for holding your money? If they did, the fees for layaway would be higher.

This is a terrific service for the consumer and has helped grow store loyalty. A great combination all around.

[sloane]

With the increased focus on lay-away plans, it sounds to me like consumers are heading toward a light version of the credit crisis...granted, without credit being involved, but with the same concept of buying things with your current and future (theoretical) money that you can't afford, tying up money from future paychecks without knowing what expenses might come up, rather than allocating that money to savings...
And yes, the fees ($5 and a potential 10%) are low--but they're still there. Whereas if you first saved a small amount, you would have no fees. And if you paid it on a credit card and paid off the balance in full by the end of the month, the purchase would also be fee-free.

That said, it's definitely a smart move on Kmart's part to offer this service!

It will be interesting to see how the market share gets divvied up between Target, Kmart, and Wal-Mart.

Dr. Tantillo, who has a marketing blog, just did a post on Target and their new ad campaign, highlighting their addition of fresh produce and low prices. You can see it at: http://blog.marketingdoctor.tv/2008/10/24/value-for-money-is-back--target-does-marketing-right.aspx

[KC]

I'm 35 and can remember going shopping with my mother in the early 80s for clothing at the local department store. She'd always lay-away things, since most fashions came out a few months before the season you could wear them. I always asked her why she didn't buy them - "we don't have the money" was always the response. I never saw her pull out a credit card (she had one) - she just preferred to pay $10 a week or something of that nature.

So imagine my surprise when I saw K-mart's ads for a layaway program. My husband asked "What's layaway?" That's the difference between growing up with money and growing up without it. But I remember thinking that K-mart was on to something here. I know that lay away was always a means for my lower middle class family to get some things it needed without resorting to a more expensive version of credit. I wish them luck with this program and hope it does help some to avoid high credit card fees and still get some necessities and maybe a few luxuries that they need to make the holidays feel like holidays.

[PJ Wyatt]

The people who invented layaway plans were not stupid. You had to go into the store weekly to make payments on your layaway, and once you were in the store... well, just TRY not to find something else to buy!

TOD SAYS: Ha -- good point! But then maybe if you keep going back every week, after a while you've got so many items set aside on layaway that every time you go in you have to make 4 or 5 payments -- so there's no money left to buy anything more ... ;-)

[elizabeth-rose]

"Layaway" is the best way—I furnished most of my home with layaway. Credit cards [are] the moderen day "slave masters," because the institutions that loan you money also own you to a degree. You are enslaved to their maddening system. [With layaway] it may take a little while to pay and to actually get your purchase, but it will not take years of payments and interest. So try it and be patient. Then you will have what you want and need.

[J A Belle]

Even with the fee for opening a layaway account and the penalty for canceling, this a far better than using a credit card. If your trying to keep your spending in-line I think this is the way to go. Yes you could save the money on your own and avoid the fees and perhaps the penalty, but the item may be gone, with layaway its tucked in the back of the store. Also if the price has changed in your favor you get the adjustment and the only fee you paid was for account set-up. Not bad considering they had to take it off the shelf and hold it just for you.