The revival of more businesses offering layaway plans appears to be a cause of concern for Sen. Charles (Chuck) Schumer, expressing that the break from credit cards may cost consumers far more.
I admittedly have not researched all the various layaway programs available. Most seem to charge a set fee (generally $5.00) plus a 10% down payment... then monthly payments (some may be weekly) -- with all but the $5.00 fee going towards the purchase price.
I'm really not following Sen. Schumer's calculations on how this compares to a credit card which generates interest payments on top of the purchase price and annual fees collected.
The Debate Question: Which is better (from a "cost to consumer" standpoint) -- Layaway or Credit Cards?
Here's the article prompting the debate:
APNewsBreak: Senator warns of layaway's cost
ALBANY, N.Y. (AP) — The return of layaway plans this holiday shopping season is raising concern that the break from credit cards might actually cost consumers far more.
For example, a rock 'n' roll Elmo doll that requires a $5 layaway fee and a 10 percent down payment for a month can equal a credit card that charged more than 100 percent interest, U.S. Sen. Charles Schumer said Sunday.
Schumer is asking major retail associations to direct their members to more clearly present their layaway fees to customers. The Democrat says the ultimate cost of a layaway with a $5 fee can equal 40 percent interest over a month or two for many common purchases compared to the annual rates of most credit cards.
He said if stores don't better present the cost of layaway purchases, he will ask the Federal Trade Commission to determine whether the increasing use of layaway is a deceptive or misleading business practice. Historically, stores started dropping layaway plans in the 1990s in part because of these costs and inconveniences.
But it's wrong to compare layaway fees to credit cards and the fees are already clear, a major retail association says.
"It is a leap to suggest that $5 on a $100 purchase is twice the going rate on credit cards, which today averages 14.99 percent nationwide," said Brian A. Dodge of the Retail Industry Leaders Association.
"Layaway is not credit, period," Dodge said Sunday. "Layaway programs provide consumers with a responsible, low-cost alternative to credit cards that allow customers to buy an item that they want but the flexibility to pay for it over time without accumulating debt.
"These programs typically accommodate a segment of consumers who are either unable to or unwilling to access credit," Dodge said. "They are remarkably simple and transparent. And unlike credit cards, the fees and terms never change."
Stores have noted that any fee they charge shouldn't be seen as a windfall.
Often the fee covers the cost of handling a layaway account, the cost of keeping workers available to provide items when the layaway is paid off, and the cost of storing items for weeks and disrupting what could be a faster turnover. The fee can also be a "restocking fee," which covers the cost of returning the item to the shelves if the layaway isn't completed. In addition, retailers say the feel helps reduce the loss if a layaway isn't completed and item can't be immediately resold.
Schumer said most states limit credit card interest at 16 to 35 percent, but layaway plans can end up costing more in borrowing costs for consumers who often have a lot of credit card debt.
"These layaway programs are nothing more than hideaways for sky-high interest rates that consumers would never tolerate with a credit card," Schumer said. "The holiday season is supposed to be about giving and not taking, but these layaway programs are taking advantage of people and charging them outrageous interest rates, under the guise of making it easier and more affordable to shop."
Schumer said late Friday that he is sending letters to the Retail Industry Leaders Association and the National Retail Federation asking them to advise their members to clarify layaway costs. The federation declined to comment until it could research Schumer's concern.
Major retailers nationwide are reviving the layaway plan that started during Great Depression as a way to help low-income people without access to credit to buy presents during the holidays.
"As a financing option, layaway is decidedly worse than most credit cards," Professor Louis Hyman of Cornell University recently told The New York Times. Hyman is the author of "Debtor Nation: A History of America in Red Ink."
The Debate Question again: Which is better (from a "cost to consumer" standpoint) -- Layaway or Credit Cards?
Neither. If you don't have the cash in hand, you shouldn't be buying it. Period.
For us, credit cards. We use them for everything. We pay them off monthly so have no interest charges. We have a great points program ~ have not paid for a hotel or flight in years and we travel a lot!
I think layaway is a responsible way to pay for something that would have accrued a lot more than a credit card.
If you are paying off a credit card every month and not accruing interest that is a totally different situation and is wonderful.
I do agree that people should just pay for what they can afford cash in hand (or paid off immediately). Instead of layaway, put a Christmas bank account and stash $10 - $20 a week throughout the year, then there would be no need.
$5 fee doesn't seem outlandish by any means to me. I don't understand the issue in the article.
Personally I don't have a credit card only a visa which uses my own funds, and I also don't use internet or phone banking so if I want money on that card (other than what goes in each month for the internet) I have to go to the bank to transfer it. I also don't use layby because if I don't have the money I don't need it that badly.
I'm guessing that the number of folks who hold credit cards and responsibly pay them off every month is a very, VERY small minority out there. I haven't researched this, but I'm also guessing that a large percentage of Americans hold some amount of credit card debt, likely at high interest rates.
I think a $5 layaway program is by far the better way to go from a financial standpoint! It holds you responsbile for paying everything off before you can get the item(s). That said, there are some exceptions as others have pointed out including those who have the means to pay off a credit card every month, especially one that earns them points to garner other services and products at a reduced price.
I heard on the radio a few weeks ago that 60% of Americans had not paid off last years Christmas Card Debt. To me that means that for those 60% layaway would actually be a much better option because they don't let you leave with it until you pay for it. We don't do either (huge attic and sale shopper), but I think it's insane to take away the option to pay a flat rate for a service that people can easily understand. If you aren't responsible enough to budget for a holiday that comes around every single year, then you probably aren't going to pay that card off fast enough to make the layaway fees look bad.
For Christmas shopping, I always use my debit card. We buy a little a time starting early in the year to avoid a big overspend right before Christmas. I think layaway is a great option for those that can not afford to pay it off right away, there is not interest or late payments. You pay as you go and you don't get those items until they are paid in full. Unlike credit cards, which do accrue interest and most people don't pay it off 100%.