This week, filmmaker Tyler Perry and musician Kid Rock made headlines for taking part in what’s become a holiday tradition among some wealthy people: paying off the layaway accounts of strangers. Layaway allows shoppers who can’t pay for merchandise all at once to reserve the product and pay for it in installments. While stores offer layaway year-round, it is especially popular during the fall when consumers use it to purchase holiday gifts that typically cost at least $50.
Perry cleared the Walmart layaway accounts of 1,500 Atlanta-area shoppers, a deed that totaled $434,000. Inspired by the Madea star, Kid Rock paid off $81,000 in layaway balances at a Nashville Walmart. And last week Gayle Benson, owner of New Orleans sports teams the Saints and the Pelicans, paid off about $100,00 in Walmart layaway balances.
Perry explained his gesture in an Instagram video post: “I know it’s hard times and a lot of people are struggling,” he said. “I’m just really, really grateful to be able to be in a situation to do this. So God bless you. Go get your stuff.”
Celebrities aren’t the only ones playing the part of layaway fairy, or angel, as they’re often called. Anonymous donors have recently made headlines for paying off layaway balances at Walmarts in Philadelphia, Clarksville, Tennessee, Augusta, Georgia, Uniondale, New York, Derby, Vermont, and Longmont, Colorado. The practice has become so common that there’s even a group called Pay Away the Layaway devoted to the cause.
Although these gestures are great PR for companies like Walmart and for the donors who come forward, the press about layaway often overlooks the ways it can actually hurt low-income shoppers. While layaway may be attractive to people without spare cash or access to credit, customers should know its potential pitfalls, especially as the service enjoys a resurgence in the decade after the Great Recession.
Layaway took off during the Great Depression
The concept of debt dates back to the ancient world. The Bible alone mentions debt and possessions more than 800 times, according to Forbes. But the practice of layaway isn’t even a century old. While 19th-century Americans did rely on installment plans to buy expensive items, Harvard Business School historian Nancy Koehn told the New York Times that layaway as we know it wasn’t popularized until the Great Depression of the 1930s, which left many shoppers unable to buy basic necessities, let alone holiday gifts.
Unlike loans and other types of installment plans, layaway does not involve interest. Instead, layaway customers put some money down, often about 10 or 20 percent of the purchase price, to reserve an item. They then make regularly scheduled payments until the cost is covered in full.
The name layaway stems from the fact that businesses that provide the service “lay” goods “away” in storage for customers until they are paid for completely. Some businesses charge storage fees in addition to requiring shoppers to put money down for items. Layaway thrived for decades after its invention but began to wane in the 1980s when credit cards became commonplace.
When the Great Recession began 11 years ago, financially devastated Americans turned to the service once again. In 2011, for example, NBC News pointed out that the number of layaway contracts at stores like Sears and Kmart had more than doubled since 2008. During the same period, Toys R Us expanded its layaway program to include a greater number of products.
In addition to these stores, retailers such as Big Lots, T.J. Maxx, Burlington Coat Factory, and GameStop offer layaway. For low-income shoppers without credit, layaway may be one of few ways to gradually pay for merchandise. But it can be financially harmful to such consumers too.
Layaway comes with risks for low-income shoppers
Writing about how Rock and Perry recently paid off layaway balances at Walmart, Chicago Tribune reporter Dahleen Glanton pointed out some of her concerns with the service.
“The problem with layaway ... is that most people who don’t have the money to pay for things upfront won’t have it four months later,” she said. “They could end up losing not only the items they had put aside but also must often pay a cancellation fee and forfeit the service fee, if one was required.” This can leave low-income customers worse off financially than they were at the outset.
Glanton also argued that the fact so many holiday layaway balances had yet to be paid two weeks before Christmas signals the extent of the problem, as it’s unlikely that all of the customers helped by Perry and Rock would have been able to clear their balances in a fortnight.
Better Business Bureau president Claire Rosenzweig told Consumer Reports that shoppers like layaway programs because they avoid paying interest fees, “but there are some risks that consumers should be aware of, such as the company going out of business.” In that event, layaway customers may find it difficult to recover the money they’ve put toward an item.
And that’s not the only issue. Customers who change their minds about a layaway purchase may not be able to get refunds, or they may be required to pay a 10 percent restocking fee, according to Consumer Reports. Sometimes shoppers make their last payment on an item only to discover that it is out of stock because stores tend to prioritize customers who can pay in full over those using layaway.
Before putting an item on layaway, it’s important for customers to get a written contract and find out if the store offering the program charges service or restocking fees, provides refunds or store credit, according to the Better Business Bureau.
Shoppers also should know whether the item they want will be reserved specifically for them or if there’s a chance it could be sold to another customer. Plus, they need to be aware of payment due dates; the length of time merchandise can be placed on layaway; and, if applicable, the estimated delivery time for their item. (Some stores don’t actually order an item placed on layaway until the customer has paid for it in full.)
A decade after the Great Recession, many Americans have yet to rebound financially, making layaway an appealing payment option at the moment. In fact, for people who don’t qualify for credit cards and have little cash to spare, services like layaway may be their only way to pay for holiday gifts.
It’s certainly admirable that celebrities and anonymous donors recognize these consumers’ precarious financial predicament, but it’s also important to recognize the costs and drawbacks of this payment system.
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