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Neither a borrower nor a lender be;
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.
     – Polonius, Hamlet, William Shakespeare

Layaway

The other day I saw an interesting commercial on television.  Kmart was taking advantage of the upcoming holiday season to promote additional interest in its layaway program, a program it has offered for 40 years, and one of the few of its kind left in the United States today.  Many of the other big retailers, including Walmart, JCPenney, Target, and Kohl's, have either phased out their layaway programs or never offered one to begin with, but Kmart's program is apparently still going strong.

Layaway, for those not familiar with the word, is a term from another era of shopping before credit cards became the standard for purchasing goods.  A customer who uses layaway makes a down payment to the store to hold merchandise (putting an item "on layaway"), and then makes regular payments (weekly, biweekly, or monthly, depending on the store) until the item is paid for in full.  At that point, the customer owns the merchandise outright, and can take it home.  There's usually a maximum time-frame allowed for payments and a small service charge, but no other interest charges or other fees associated with the purchase of the item.

Two or three generations ago, everything was bought on layaway.  Furniture, jewelry, suits, appliances, and electronics were all candidates for layaway programs.  But times have changed, and now instead of living within their means, millions of Americans are opting to buy now and pay later, with disastrous results.

Consumer Credit statistics reported by the Federal Reserve indicate that in 1990, approximately 82 million Americans owned credit cards, racking up about $338 billion worth of charges a year (about $4K per person).  More recent figures indicate the amount charged per person has since skyrocketed; In 2003, for example, approximately 144 million people held credit cards, charging a whopping $1.5 trillion, collectively (over $10K per person, annually).  Furthermore, most of these charges are NOT being paid off immediately, and are instead converted to outstanding credit-card debt, with the average household owing more than $8,000 in credit card debt.  At an 18% interest rate, paying only minimum payments, that kind of debt could take families 30 years and over $20,000 to pay off in full.

So, besides selling all of your worldly possessions and moving to a yurt in Mongolia, what are you to do to avoid this kind of debt situation yourself?  Obviously, to stay out of debt, you need to spend less than you earn, or to put it another way – only spend money you currently have.  Ideally, you'd keep your money in some sort of interest-earning account until you needed to spend it, only taking it out to purchase each item as it was needed (or as a compromise, to completely pay off that month's credit card balance).  But if you're too much of an impulse shopper or not aware enough about your bank-balances to make this work, layaway might be the perfect middle-ground between saving on your own and spending yourself deeper into a pit of debt.

A layaway service provides the following benefits for customers:

• It helps people stay within their means.  Many people spend more than they earn simply because they have the credit limits to do so.  People are more likely to be frugal with their money if they don't receive the goods until they have completely paid for them.
• It breaks purchases down to an easy-to-visualize payment plan level.  Can you afford to take $40 out of your paychecks every two weeks for a year?  If so, you can afford that $1000 television in a year without paying a cent of interest and never stepping a foot into credit card debt.  Putting that same television on a credit card might take 12 years to pay off, and be over twice the price in the long run.
• If it turns out you don't want/need the item, you can get almost a complete refund of the money you've put into payments.  Kmart, for example, charges a $5 service fee when you put something on layaway, and another $5 cancellation fee.  Everything outside of this $10 is yours if you decide not to finish purchasing the item.  There are a fair number of impulse purchasers who regret purchasing their items but never even try to return their purchases.  This would definitely cut down on impulse buys.
• It's not tied to a credit card, so anyone with the cash can put items on layaway, regardless of credit rating or number of credit cards owned.

Many think layaway has a stigma of being a tool for low-income consumers with bad credit, but it can be a useful tool for anyone who wishes to purchase items on an installment basis without paying interest charges or fees.  It's a shame that more stores don't offer layaway programs.  If they did, I could see credit counselors and debt management services advising the use of layaway programs (when new purchases are absolutely necessary!) as one of the first steps people should take when recovering from credit card debt problems.

If you're interested in using a layaway program, here is a short list of places I hear still offer layaway services for customers:

• Kmart
• Marshalls
• Burlington Coat Factory
• T.J. Maxx
• K.B. Toys
• Fashion Bug
• Big Lots (furniture only)

and online:

• Lay-away.com
• eLayaway.com
• Layaway-Travel.com
• Cloth Diapers Layaway (by Baby's Abode)

NaBloPoMo 2008!

[NaBloPoMo 2008 - #13/30]

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