Critics offer caution on consumer layaway programs

Sep. 10, 2012
Critics offer caution on consumer layaway programs
By Lindsay Wise | McClatchy Newspapers

WASHINGTON -- ]

For cash-strapped parents determined to snag that trendy Furby robot or iPad Mini this Christmas, holiday layaways seem like a godsend: Reserve the toy now and pay later.

But critics warn that fees for the increasingly popular layaway programs could wind up costing people much more than if they’d paid by credit card. “These things can come back to bite you,” said Tod Marks, the senior projects editor of Consumer Reports magazine. “Most of the time they’re relatively harmless, but the only way to know for sure is to understand the complete terms and conditions. . . . The devil is always in the details.”

As retailers launch their layaway programs this month for the upcoming holiday season, some big-box stores are revising their policies and slashing fees.

Layaways were commonplace in the 1930s and 40s but they faded in popularity as credit became easier to obtain. They re-emerged in recent years after the recession hit and banks tightened credit.

Stores tout layaway as a consumer-friendly alternative for shoppers who can’t afford to pay up front and don’t want to go into debt. Customers pay small service fees to open layaway accounts with stores, and they make initial down payments, usually 10 to 25 percent of the total. Once they pay off the full amount, they can take home their purchases.

If customers don’t make payments in time, or back out of purchases, stores often charge cancellation fees, as well.

“People want the feeling like they are able to buy what they want today, but they’re not actually buying it. They’re putting it aside and paying a higher price for it,” said Louis Hyman, an assistant professor at Cornell University’s School of Industrial and Labor Relations who’s the author of the book “Debtor Nation: The History of America in Red Ink.”

A layaway purchase is like a very expensive loan that doesn’t allow the borrower to use the goods until he or she pays off the loan, Hyman said. “It’s like you had to pay your mortgage in advance for 30 years and you don’t even get to live in your home.”

To illustrate his point, Hyman gives the example of a woman who puts $100 worth of toys on layaway. She makes a down payment of $10, plus a $5 service fee, and pays off the rest over a 60-day period.

According to Hyman’s calculations, she’d be paying the equivalent of a 44 percent annual percentage rate for a $90 loan. The national average for APR on a credit card is about 15 percent. For those with bad credit, it’s about 24 percent.

If the woman failed to make all the payments and had to fork over the $10 cancellation fee, she would have paid the equivalent of 131 percent APR for a two-month loan, Hyman said.

“I think there’s a predation quality,” he said. “To my mind, there’s no advantage to the consumer to using layaway as opposed to saving. I think it makes more sense to just put the money under your bed, or even better, in a bank.”

Hyman would like to see stores prominently post the APR equivalent for layaway fees so that consumers can easily compare the cost of using layaway to using a credit card, an idea also championed by Sen. Charles Schumer, D-N.Y.

Schumer sent a letter last year to the National Retail Federation and the Retail Industry Leaders Association to encourage member stores to take such a step. If stores didn’t do so voluntarily, Schumer said, he’d request that the Federal Trade Commission adopt rules requiring such disclosure for layaways. The FTC wouldn’t comment on whether Schumer has followed up with that request.

For now, no federal law specifically governs layaways, though the Federal Trade Commission Act and the Truth in Lending Act can apply if stores mislead shoppers or fail to disclose important terms of their layaway plans. State and local and laws vary widely.

In a written response to Schumer last year, Retail Industry Leaders Association President Sandra L. Kennedy defended layaway programs as “a responsible, low-cost alternative to credit cards.”

Mallory Duncan, general counsel for the National Retail Federation, said his organization had looked at Schumer’s letter but there was nothing to discuss.

“Sen. Schumer mischaracterized what layaways were from the first instance and he’s not said a peep about it ever since, which means maybe he’s realized that,” Duncan said. “He didn’t raise a real issue.”

Schumer’s office didn’t reply to a request for comment on this story.

Some of the negative buzz could be quieted by news that major retailers are slashing layaway fees as they roll out 2012 holiday plans.

Toys “R” Us last week waived the service fee for layaway orders created through the end of October. After that date, there will be a $5 service fee.

“Plans to offer free layaway this holiday season have been in place for some time,” Toys “R” Us spokeswoman Katie Reczek said in response to written questions.

Wal-Mart followed suit, eliminating last year’s $10 cancellation fee and lowering the fee it charges for opening a layaway account from $15 to $5. Wal-Mart customers will receive their $5 back as gift cards after making their final payments. Last year, Wal-Mart didn’t refund the open fee.

Wal-Mart also will offer more time for customers to make their payments. They now have 90 days to complete their purchases, up from 60 days in 2011.

Marks, of Consumer Reports, cautioned shoppers to use common sense: Get everything in writing, read the fine print and keep accurate records of payments.

“You ask the right questions. You make sure than you know the risks and rewards. And then you decide if it’s worth it,” he said.