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Should You Try Layaway?

As credit limits continue to drop, more cash-strapped consumers are considering layaway as a gift shopping possibility. The installment pay-plan (which originated mid-century as an option for low income families) has made a comeback this season in superstores such as Walmart, Kmart, Sears and Toys 'R' Us.

At first look, the offer seems ideal: pay a little bit at a time and get your presents before the holidays—everyone wins, right? Maybe not, according to Louis Hyman, an assistant professor of history at Cornell University’s ILR School and author of Debtor Nation: The History of America in Red Ink. His research shows the hidden fees of layaway are actually much steeper than credit card interest rates.

“What bothers me most about layaway is that it's being promoted with a moral shine of being 'debt-free'," says Hyman. "When, like interest charges, all it does is sap working people's incomes."

For instance, Walmart charges a $5 additional payment to participate in their layaway program. If the average customer gathers about $100 worth of items and puts 10 percent down ($10), they are left with a $90 loan to pay over two months. That $5 fee on your $90 advance translates to an abnormally high annual percentage rate (APR): 44 percent. Plus, if you can't pay your bill in full, you don't receive the merchandise and still get slapped with an additional cost of $10. Add that to the first $5, and it amounts to the equivalent of a 130 percent APR. And nothing under the tree.

"People think interest is bad and one time fees are good," Louis says. "You have to make the two comparable." To help with the abstract math, he recommends this calculator on Efunda.com, which translates any type of loan fees into an APR.

However, there are occasions when layaway is beneficial. You just need to plan ahead. "Try to do it all at once and in one store," Louis Hyman advises. "You pay the fee one time and get the best deal." He also suggests carefully considering each item before putting money upfront. If the product (or its temporary sale price) won't be available by the time you have the cash, paying it off slowly might save you funds in the long run. If this doesn't apply to anything on your shopping list, Hyman recommends adding the amount of money you would use for layaway to a savings account instead.

“Shoppers can get the same benefits, plus interest, by putting money in a no-cost savings account," he told us. "Even the proverbial cookie jar would be better since it doesn't charge any fees.”

Are you using layaway this season? Do you think more stores should use the program?

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