Layaway Christmas

K-Mart has a new ad: Pick out your Christmas presents today, pay a little now and a little as you go along, then pick up your paid-for presents in time for holiday giving. If we needed evidence of the constriction of consumer credit, here it is. K-Mart is advertising the layaway plan that department stores used for decades before the free flow of credit turned the layaway plan into a relic.

With Mastercard and Visa cards handed out like cheap candy, layaway plans had nearly disappeared. The old-fashioned method for budgeting--pay a few bucks each week on your purchases--made no sense to millions of customers who could take the goods home and pay a little each month forever after. For more than a decade, when I have taught 507(a)(7) priorities, I have had to explain these transactions to a roomful of students who have never even heard of pay-in-advance. (And special thanks to one of those students, Sydney Leavens, who  recognized the connection to the K-Mart ad.)

Could this ad be an early sign of how purchasing will change in America? A Pay-Now, Buy-Later plan will undoubtedly constrict spending in the short term, but in the long-term it would mean that the money that now goes to interest, fees and interchange fees (about $107 billion in 2007) can be used to buy socks, haircuts, prescription drugs and a million other goods and services.

Retailers pay about $23 billion in interchange fees so that their customers can use credit cards. Today's retailers say they have no choice:  so long as their competitors take credit cards, they must do the same or see their customers migrate elsewhere.  But if credit availability contricts across the board for consumer, the long-term fallout for K-Mart and thousands of other retailers may not be all bad.

I realize the operative word is "long-term."  If credit loosens up quickly, then cash-in-advance will be a temporary blip.  And for retailers who can't survive the readjustment (and short-term loss of sales) from credit to cash, then the long-term readjustment doesn't mean much.  But non-credit purchasing could be the wave of the future.

It could be an old-fashioned, new-wave lay-away Christmas. 

Comments

[David Johnston]

I remember those layaway counters. Some places (Marshalls for example) still have them. What a deal this is for retailers. They get to make money on the float rather than the customer making money in interest while they save up. The only reason this could make sense for the customer is if they don't trust themselves to save the money. I don't see this making a comeback. If it does then that will be depressing indeed. Maybe next we will have debtors prisons.

[Patches]

YES! I hate putting the Christmas bill on Credit! I just can’t see financing toys and clothes @ 12-14% interest. Yikes! Our local K-mart never stopped. Last Christmas, we did exactly that “lay-away”. I read or heard somewhere that Lay-away was started after the depression. Coincidence? Last year we had wanted to buy products from Wal-Mart and Academy on lay-away and they had discontinued the practice. Another side benefit to the lay away program is that it kind of puts the kibosh on your wife adding to the Christmas list later on. It helps to budget a bit better in my humble opinion. Hopefully, Wal-Mart and others will follow. Macys? Well….. maybe not.

[James Blackwell]

Obviously, companies get early cash from people that use layaway. However, layaway programs aren't all good for comapnies, and all bad for people. Firstly, companies are stuck with the headaches of storage. Secondly, when you purchase something you can't afford right now, on layaway, you know that you'll have the item when you can afford it, even if it sells out for others. Think of it as gift availability insurance.

[Raymond Bell]

Ah, why can't we return to riding again with the Loan Ranger but replace the silver bullet with a gold one.

[Wes M]

I liked layaway for the same reason James mentions: being able to "buy" something at a confirmed price while it's in stock, even if I lacked the $ right now for it. I did this for years with Black Friday deals at Wal-Mart, and might have purchased a Wii right now if any retailer still offered the practice.

[Jim Hawkins]

What an interesting observation, and the trend to encourage people to pay upfront is undoubtedly a good one. Just to add another perspective: Cree Johnson has a good argument for why layaway is not good for consumers in Welfare Reform and Asset Accumulation: First We Need a Bed and a Car, 2000 Wis. L. Rev. 1221, 1259-62. I have argued that rent-to-own is superior to layaway, summarizing Cree's points: "Layaway, to the extent it is available at all, is both costly and disadvantageous. Under a K-Mart plan that was studied, "[t]he APR for a layaway on a portable television with a retail price of $152 is 57.1 percent." Though this APR is lower than the implied APR of many rent-to-own transactions, customers using layaway (1) do not obtain the right to use the goods immediately; (2) must pay the total price in a shorter time period than rent- to-own; (3) often must pay a large deposit; and (4) often are unprotected by any consumer protection statutes." 49 Wm and Mary L. Rev. 2041, 2090.

[Adam Levitin]

You beat me to posting on this one. My jaw dropped when I saw a major retailer pushing layaway. That's a sign of some serious economic hurt.

[Robert L.]

The Lawaway option is great. Just 2 days ago me and my wife started our christmas shopping for our three children at K Mart. It is a fast and reliant way to make a purchase and doesnt hurt you financially as it would to pay with credit or rent to own. I just left retail 4 months ago and would highly discourge a rent to own. Do some research on the final cost of rent to own v.s layaway or even buying out right. Its ridiculous. In these times, mortgage, car payments, insurance, water bills, electric bills, layaway is a great option.

[Jeremy]

While the news certainly sounds like a move backwards, layaway now has an online presence via sites like lay-away.com.

If the resurgence of layaway is more than temporary, it will be interesting to see whether consumers prefer this electronic layaway to the more retro feel of in-store layaway programs.

[Martha Sherwood]

What happens if you are unable to complete payments and decide to forego the purchase? Are you entitled to a refund, and if so, how difficult would it be to obtain it?

What happens if the store goes bankrupt before you are able to make the final payment and collect the item?

Do you think these stores are actually storing the layaway item in all cases, or are they simply reserving one in their supplier's inventory?

[Martha Sherwood]

Partially paying for an item but not taking possession of it can result in loss to the customer if the store goes out of business: see http://caveatemptorblog.com/page/4/. When considering a layaway plan people need to be very aware of the overall financial health of the business with which they are dealing.

[Patches]

Looks like MSN got in on the story:

http://www.msnbc.msn.com/id/27582079

[Rebecca Davis Winters]

I remember putting things on layaway when I was a teenager in the late 1980s and early 1990s. Now I can look back and say it beats the hell out of credit card debt, which is what I had to deal with in my 20s. I would use a layaway system, but look sharp to the financial health (or lack thereof) of the retailer, to be sure!