Layaway vs. credit: the similarities
These are the major similarities between layaway and credit.
- Like credit, today's layaway plans are available for both brick-and-mortar and online shoppers.
- Both credit and layaway offer the chance to purchase something the shopper can't currently afford.
- Credit and layaway both have penalties and fees for late payments or payment defaults.
- Both credit and layaway offer the option to pay in installments rather than in one lump sum.
Lawyaway vs. credit: the differences
These are the major differences that separate layaway and credit.
- Unlike with credit, layaway prevents shoppers from acquiring the merchandise until it has been paid for in full. (This also means that with layaway, advance planning is required if you need the merchandise by a certain date!)
- Unlike with credit, layaway requires the shopper to put down a percentage of the full price (typically around 10%) right away as well as pay a small "layaway fee" (typically $5-$10).
- Unlike with credit, with layaway you select a set date (12 months is the typical maximum time frame) by which you plan to pay your balance off in full.
- Unlike with credit, with layaway plans you don't pay interest on the unpaid balance.
- Each merchant creates a standalone layaway program that is not subject to oversight by any governing body. The Federal Reserve Board and other federal governing bodies regulate credit card programs.
- Layaway programs today may take credit cards as a form of installment payment. Shoppers cannot pay a credit card bill with a credit card (with the exception being a balance transfer).
- With credit, shoppers who want to return merchandise for a refund (merchant policies permitting) can do so. Layaway refund programs, if available, may have a nonrefundable "service fee," a penalty fee, or store credit rather than cash back.
- Even if you have poor credit, don't want to use credit, or you don't have credit cards, you can still sign up for a layaway program. The same does not hold true for getting approved for a credit card.
- Unlike with credit, if you default on a layaway plan, it will not impact your credit score.
- Layaway plans don't offer the extra perks of using credit (such as airline miles rewards points, gas savings, or cash back).
- Often, there’s a minimum purchase to qualify for layaway (such as $15)—using a credit card typically does not require a minimum (although individual merchants may choose to require this).
How to vet layaway plans
Since there is no federal or state oversight for layaway plans, experts recommend taking three steps before entering into a layaway plan.
- First, contact your local Better Business Bureau (BBB) to find out if there are any complaints before putting something on layaway with a local merchant.
- Second, even if there are no complaints registered, you should then conduct an Internet search ("merchant name + layaway + complaints").
- Third, read the merchant's layaway policy closely. In particular, look for the details: when is each payment due, what happens if you can't pay, what happens if you want a refund, what are the fees associated with the program, what if the item is marked down after you've started paying?
If you have completed all three steps and no major concerns jump out at you, you can consider proceeding with the layaway plan.
Credit vs. layaway – which is the better choice?
Your dilemma: It is October 1. You want to purchase a $200 holiday gift for your child, but you don't have the cash. Should you use layaway or credit?
Option 1: Layaway
- You put down $20 + a $5 one-time layaway fee = $25.
- You owe $180 and you choose a three-month (12 week) layaway plan.
- You pay $15 per week, with no interest.
- You pick up your gift on December 24, just in time!
Option 2: Credit
- You charge $200 to your credit card.
- You take your gift home immediately and wrap it up.
- You pay your credit card balance in full on the next bill date—no interest has accrued.
- On December 25th, your son opens it with excitement!
If all goes swimmingly as described here, choosing credit is the better option. You paid no interest and you didn't have to pay the $5 layaway fee or wait to redeem your gift (and risk the store selling out, a mid-layaway markdown you can't benefit from, or other "life happens" events).
BUT, let's say you can't pay your balance in full in November, or in December. So in January you have paid 15% interest for three months on that $200—which is $6 in interest costs. So here, choosing layaway is clearly the better option because it is $1 cheaper.