One story that has caught my eye: Sears has brought back layaway after ending it twenty years ago. They're doing it in response to strong customer demand for K-Mart's program, which has been advertising its own layaway program heavily. (Sears owns K-Mart, as several commenters have emailed to point out; I've edited the post to make this clearer)
This may speak as much about credit constraints as anything else that has happened in the last few months. The moral panic about the increase in credit card use has mostly overlooked the fact that to a large extent, credit cards replaced earlier, less convenient and flexible forms of credit: personal finance loans, pawnshops, buying "on time", local loan sharks, and yes, layaway. As credit gets tighter, we're seeing consumers fall back to those older institutions; the local news here in New York was running a story on pawnshops crammed with furs and other luxury goods that they don't usually handle. One business, at least, is doing well out of all of this.
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Sears owns K-mart, don't they? It's why you can buy Craftsman tools there.
Wow, I need to hit the pawnshops...
Here's my concern: given the complete inability American businesses have revealed, to understand what an "obligation" actually means [1], what are the odds they'll actually have the item for you when you finish payments? What are the odds they won't treat the payments as free money they get to keep and pay to creditors, whether or not they deliver the item?
Expect a lot of "Oh, sorry, we, just don't have that item in stock, and [lame excuse] so we can't return your earlier payments, which were supposed to be paying for the storage space..."
[1] Examples: GM surprised they have to honor pensions,
financial companies surprised they have to pay money when CDS underliers default,
insurance companies surprised they have to pay out when disaster strikes and complaining about what a burden it is,
gift card issuers refusing to recognize the right of gift card owners to $X of merchandise, no matter how inconvenient that might be,
hotels denying the existence of your reservation when they can milk someone else for the same room before you arrive...
the list goes on.
Sears and K-Mart are both owned by Sears Holding Corp. They are probably trying to standardize practices between the two, rather than acting in response.
Stunning personal finance tip: if you can't pay cash for it don't buy it.
I find credit cards use more worrisome than less convenient credit because the greater nuisance of those methods seems to me as though it would impede irresponsible purchases by making it more bothersome, thought not necessarily harder, to do so. Paying with a credit card is facile and can be done almost thoughtlessly, but more bothersome methods offer more opportunities to wonder if what one is doing is a good idea after all.
I don't understand the benefit of layaway. Is it a self-binding issue? Otherwise, why not just save the money yourself, then go buy the item?
d- I wonder that myself. I can see getting something on layaway if it's on sale right now. Otherwise set aside the cash in savings. 3% yield beats whatever fees the store charges.
"Marketplace" had a piece on layaway last week. Some lady in NY had bought a couple ipods that way. Which is dumb because (1) ipods don't go on sale -- Apple is tight with their pricing scheme (2) electronics get cheaper with time.
Matt B:
The people for whom layaway is attractive are not financially literate enough to make the arguments you make. Your arguments are correct nonetheless.
Layaway is a way to get the less educated to consume. These are the people who constitute the majority of mass retailers' customers. The people who can afford to buy in cash, or wait until they have cash, are gravy for retailers as these customers are cheaper to acquire (no need to set up funding schemes for them.)
Can the return of the Christmas Club be far behind?
I used layaway for my interview suits when I was in law school. ("Save up and come back" sounds good, but the suits would almost certainly have been sold to somebody else in the meantime, which would mean I'd have to go suit shopping again - ugh.) I always had good experiences with it. Of course this was before I discovered how much cheaper everything is in consignment stores.
Silas, they put your items aside for you in a back room, and you sign a document which tells you what the terms and fees are if you want your money back (or never show up to make another payment). At least that's how Casual Corner used to do it...
My wife bought me a painting through layaway. Like Princess of Swords, she couldn't count on the painting being around 4 months after the layaway payments were finished.
I vaguely remember my mother putting something on layway around circa 1972. Don't think I've even heard the term since then until this year.
Expanding on
Stunning personal finance tip: if you can't pay cash for it don't buy it.
Posted by Dave | November 14, 2008 12:25 PM
If he/she/they have not paid cash,
you have not sold it.
Princess is correct. The item is tagged and literally "laid away" in the back of the store. At least that's always been my experience.
My family did a lot of this when I was growing up. In addition to locking in a sale price, it ensured that you'd be able to get a scarce item/size/etc., even if you didn't have the money at the time.
I also think, for many folks with a more old-fashioned set of monetary values, layaway felt better than using a credit card - in that you didn't actually get the item until you'd fully paid for it.
Maybe out of nostalgia, I like the idea quite a bit. I think we could all use a little more "saving up," in whatever form.
I don't know if they've made any changes to the historical layaway plans, but the plans allowed you to lock in the price (always a nice feature during sales, but not every sales item was eligible for layaway) with NO interest charge. Because the store held the collateral, and you had to make an initial down payment, there was no risk to the store which had to be translated into interest fees. I'm sure that the companies had historical data telling the stores what percentage of laid-away items were never finally purchased, so they could weigh that against the known sale and receipt of some money.
To be correct: K-mart Holdings Corporation in fact purchased Sears, and then assumed the name Sears Holdings Corporation, as was decided in the acquisition dealings.
Actually K-mart bought Sears and then decided the Sears Holdings name had more appeal.
From CNN at the time of the "merger":
Kmart is buying Sears, Roebuck & Co. for $11 billion in a deal that will marry two of the nation's oldest retailers that had trouble keeping up with the changes in American culture around them. (http://money.cnn.com/2004/11/17/news/fortune500/sears_kmart/index.htm)
The idea of lay away was popular until credit cards made it so easy to buy now pay later rather than pay now buy later.
I think this is an improvement. This is a much healthier way for poor people to aquire stuff than using a 28% credit card.
Princess_of_Swords: Thanks for taking the time to detail your experience with the intricacies and standard practices prevailing with respect to layaway at the time you availed yourself of it.
Now I'm going to explain to you how it works in the real world.
In the real world, an obligation no longer means anything.
-GM was obligated to pay pensions. They didn't even bother to internally classify them on the same level as a bond.
-Insurance companies are obligated to pay when disaster strikes. They fight as hard as they can to avoid paying, even for plain vanilla cases.
-Individual consumers buy things on credit, deferring the first payment for a long while. They are routinely caught not having saved for that big first payment.
-Securities brokers engage in naked short-selling of stocks, which obligates them to produce actual ownership of that stock at a later date. Yet as we've seen recently, they've ended up flooding the market with fake stocks and then casually aver that they "can't locate your stocks" and offer to reverse your purchase as if it were no big deal.
-Gift card issuers are unilaterally stealing money from gift card owners on the grounds that "they need it" because they're in financial trouble, despite having obligated themselves to treat the gift cards as equivalent to cash.
-AIG got a massive bailout from the Fed, but, we were assured, they would be obligated to pay a hefty penalty interest rate and start immediately and orderly unwinding their enterprise. Well, the Fed went back and cut their payments in exchange for nothing, debasing the Fed's assets (and thus the dollar), and AIG has done virtually nothing to liquidate its assets.
You get the point. I just don't care how you think things used to work back then. We are in a new world, where only us responsible commoners have to keep our word.
they put your items aside for you in a back room, and you sign a document which tells you what the terms and fees are if you want your money back
Yes, just like the Social Security lockbox. Second time this week I find myself agreeing with the poster formerly known as Person. I don't trust the bastards either.
Whoa Gene, when was the first time this week? Are you the guy that's much more left-wing that I am, but whose position keeps converging to mine (or vice versa)?
Btw, I've expanded that comment into a more detailed, hyperlinked post on my bloggy. Enjoy.
re converging: yeah that's pretty much it.One of us either has lost his mind or come to his senses.
Layaway always kind of boggled me.
It's not really credit, is it? I mean, you pay in full before you actually get the thing.
What's the point? Label a jar "TV fund" and then put 30 bucks a paycheck in.
Layaway lets you lock in a sales price or a hard-to-find item now, and come back with the full payment later. It can also be useful for Christmas shopping (pay a bit down, and the store stores it in their back room until you pay it off and pick it up). On the other hand, if you're just using it to make time payments, you're far smarter to put those payments in savings and stay out of the stores until you've got the full price.
From the retailer's perspective: In exchange for storing inventory for longer, they lock in a sale now, and they bring the customers back into the store at least once, giving them a chance to sell something else. The idiots who pay things off weekly for four months, probably make small impulse buys totaling as much as the big-ticket item in layaway.
And if the customer defaults, they can sell the item and keep the money, making a huge profit on a little bit of extra inventory, storage, and paperwork cost...
As someone who actually runs a shop (part time) I'll say that from the retailers point of view:
1. Layby is good, from the bird in the hand point of view. I'd much rather some customer put something on layby than saved up for it. Who knows what might change their mind.
2. At least once, we've have a certain employee sell something that was clearly in the storage room labelled SOLD and on layby. We did end up able to get a replacement for that customer. And my wife hit the employee with a belt. (No, this was not in the USA).
Taking my admittedly ancedotal experiences with layaway as representative of my total world view of "how things used to work back then" is probably overreaching just a bit, don't you think? Unfortunately, dishonesty and stupidity are not brand new inventions of the modern world.
Agreed that cash payments are best, but layaway is probably a better deal than credit cards for most people (and yeah, I know, that's not saying much).
Layaway is not borrowing or loaning. There is no interest earned or paid.