When Layaway Makes the Most Financial Sense

It might sound old-fashioned, but these programs can still work in your favor.

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When it comes to making a large ticket purchase, one of the most overlooked options today is layaway. But it shouldn’t be: Layaway allows you to make large purchases through small payments over time, instead of paying high interest rates through credit cards or other financing options. Many stores, both large and small, offer layaway services, though fewer and fewer are advertising this service.

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But is layaway for you? Here’s a guide to deciding whether or not it’s the right choice.

First, let’s take a look at how it works: Layaway is an installment payment plan that shoppers use to be able to afford more expensive merchandise than they could otherwise afford. When a customer makes a purchase, the item is placed into layaway by the retail establishment. The customer signs an agreement stating that he will make a set payment for a set number of months until the balance of the layaway is paid. After the balance is paid, he can take his item home with him. Given this description, you can see why it's also known as "forced savings."

Now why would anyone want to use layaway when they could just save up the funds they need in a free goal-oriented savings account before making a purchase? Or how about doing things the old-fashioned way and just working on a budget for your big ticket item by using a money management software desktop tool?

Well, here are a few reasons why using a layaway plan might be the best option:

1. The customer can take advantage of a sale price or other special opportunity without having to wait for the chance to afford the item.

2. Layaway allows you to avoid fees associated with other forms of financing. While most stores charge a fee for utilizing their layaway service, this fee is significantly less than the interest or upfront fees that are charged by other lenders.

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3. Purchases for special occasions can be stored in the retail location until the customer is ready to use them. Layaway is an especially useful service when making large purchases for Christmas, birthdays or other special occasions. This is because the purchases can be safely stored (away from prying eyes!) until the customer is ready to give the gift. Layaway is also popular during the holidays because it's a time when people are under pressure to go shopping on a fixed schedule.

4. If you want to avoid debt or don't have a credit card, then this is one way to commit to a purchase even when you're short the money. It's good news when you don't have to worry about getting out of debt.

While layaway is a lot less expensive than other forms of financing, there are of course, the drawbacks. These include:

1. Purchases placed in layaway cannot be utilized by the customer until the balance is paid in full. The retail establishment will retain ownership of the items and will hold them until the balance of the purchase is paid in full. So if the purchase is particularly large, it may take several months before the customer is able to use the item.

2. If, for any reason, you are unable to continue making payments on the items in layaway, the store has the right to cancel the layaway agreement and in some cases, the customer forfeits any monies paid toward the purchase. This can result in a significant loss of funds to the customer.

3. Items placed in layaway are purchased at the price identified at the time of purchase. While this can work to a customer's advantage -- say, if the item is bought on sale -- this can also go the other way: if the price is reduced at a later time, the customer is unable to take advantage of the reduced price unless the layaway is canceled and the item is re-purchased.

So, should you try layaway? It still makes much more sense to defer purchases until you can afford them, as planning ahead for a purchase is always much cheaper in the long run. But many of us aren't planners and a lot more of us may not be interested in incurring debt. So this is certainly one way to make large ticket purchases without sacrificing large amounts of cash to fees and high interest charges. It's an option that has a cost, but one that seems to still work for a good number of shoppers.

Silicon Valley Blogger is a full time blogger and online entrepreneur who writes for The Digerati Life and The Smarter Wallet sites that cover general personal finance topics ranging from investing and saving to credit and debt management.