Layaway plans — which allow customers to make purchases with a down-payment and pay the balance in installments before taking an item home — had faded into near-oblivion in recent years, as more consumers relied on credit cards for budgeting. But, thanks to the tough economy and stricter lending regulations, layaway is making a comeback. Wal-Mart, Sears, Toys-R-Us, and other U.S. retailers have all recently revived their layaway programs.
Should your retail business offer a layaway program this holiday season? Consider these pros and cons.
Pro: There’s no financial risk on your part. Unlike credit-card purchases, customers don’t take possession of the products they put on layaway until they’ve paid in full. If they default on their debt to your store, you’re free to resell the goods in question to someone else.
Con: Layaway programs require detailed contracts and recordkeeping. It’s important to provide detailed written information to your customers, in order to avoid any misunderstandings or trouble with consumer-protection bureaus. Before launching a layaway program, determine how and when customers should pay deposits and installments — and what will happen if the customer doesn’t pay the full amount owed by the date it’s due. Check out the FTC’s guide to offering layaways. Your city or state may also have laws governing layaway practices. Consult a lawyer to avoid any complications.
Pro: Layaway options can provide incentives for customers to spend more in your store. Most stores set a certain minimum amount for layaway purchases: For instance, Walmart shoppers must spend a minimum of $50 (plus a $5 service fee) in order to use the store’s layaway services. Shoppers who do not have cash on hand to splurge on a Christmas gift are more likely to make purchases when layaway is an option.
Con: Layaway plans are often viewed as predatory lending practices. Although you may think that offering a layaway plan is a good strategy for helping low-income families budget for large purchases, many consumer advocates disagree. In a New York Times op-ed piece, Cornell professor Louis Hyman calculates that the service fee on a $100 layaway purchase at Walmart equates to a 44 percent credit-card APR. To avoid any suggestion that you’re taking advantage of your customers, consider eliminating service fees on layaway purchases.