3 reasons not to use layaway

This post comes from Gerri Detweiler at partner site Credit.com.

"Layaway is back!" the headlines are telling us. Numerous retailers are promoting layaway for cash-strapped holiday shoppers in the hopes of boosting sales.

Almost every major retailer offers layaway: Sears, Kmart, Wal-Mart, Toys R Us and many more. And although it may sound like I am knocking layaway, I do understand how important noncredit options may be for families who are really struggling this year. Still, it's only fair to warn that if you use layaway, you may:

Miss the best deals. While you're paying on your item on layaway, you may miss opportunities to buy that same item at a deep discount as we get closer to the holidays. Ball State University's Center for Business and Economic Research predicts "a rush to discount over the holiday season, which stretches 30 days from Black Friday through Christmas Eve."

It's true that it can take a lot of legwork to grab a deal when the price is at its lowest, but it's gotten a lot easier now thanks to the Internet and apps that can help you track prices. Before you put an item on layaway, ask the store whether it offers a price-matching program if you find the item on sale elsewhere. If it does, ask for written details so you understand any restrictions, then monitor the price to see if you can do better. Post continues after video.

Be better off charging the item. Yep. It sounds like heresy, I know, but hear me out. When you put an item on layaway, you will pay a flat service charge. At Sears, for example, your fee is $5 for an eight-week layaway contract, and $10 for a 12-week contract. A $10 service charge on a $150 purchase means you are essentially paying about 6.6% more for the item than if you paid cash. On a $300 item, though, a $10 fee is only 3.3% of the sales price. Either way, it may not seem like a lot. But when you compare it with the short period of time you are paying off the item, paying interest may start to seem more attractive.

Compare the $150 purchase with a $10 service charge to the cost of paying interest on a credit card at 1.5% a month for three months (on a card with an 18% APR) and the card wins out by just a bit. On the larger purchase, layaway wins. Either way, it's not much of a difference, but it also protects you from another problem, which I'll address next.

In the examples above, I'm presuming you can and do pay off the credit card purchase during that short time period. Pay it off more slowly, or add the purchase to a card with an existing balance that you are slowly paying off, and the comparison is no longer black and white. And yes, I realize that if you have a card without a balance you probably won't use layaway. Still, the point needed to be made. This is a personal-finance blog, after all.

End up in the hole. If you can't come up with the cash to make your layaway payment, you'll usually have a short grace period after which you'll have to cancel. You'll forfeit the service fee and typically pay a cancellation fee. In the Sears example, the cancellation charge stated in their layaway guide is $15 for an eight-week contract, or $25 for a 12-week contract, unless restricted by state law.

If you're able to set aside the money you need for the purchase you are thinking about putting on layaway and then watch sales like a hawk, you may come out ahead. But of course, how many times are we our own worst enemy and fail to save for the things we want to buy? We turn instead to programs like layaway for the forced discipline it provides. It's better than running up debt, but it does come with a cost.

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