Layaway for the Holidays: Should You Sign On?

Cash-strapped shoppers may steer clear of the “buy now, pay later” of credit cards this holiday season.

Roughly 20% of consumers haven’t decided how they’ll pay for purchases this holiday season, reports financial provider USAA. So with increases in credit-card interest rates and minimum payments high, what are shoppers considering? According to predictions from the National Retail Federation and the National Foundation for Credit Counseling: layaway — at least for some purchases.

Layaway programs allow consumers to put items on hold, in exchange for a nominal fee and a deposit of 10% to 20% of the purchase’s total value. You make regular payments over the course of the contract, which can last a few weeks or several months, depending on the retailer. Once the items are paid for in full, you can take them home.

“You avoid the New Year’s hangover of paying by credit card,” says James Roberts, a professor of marketing at Baylor University in Waco, Texas. Layaway can be appealing for people who haven’t accumulated savings to spend all at once, whether for their whole holiday shopping list or a big-ticket item like furniture or jewelry. It’s also an option for those who don’t have affordable credit available to them.

Sears (SHLD) and Kmart revitalized layaway last year, advertising their longstanding programs for most items the department stores sell to shoppers worried about affordable holiday gifts in the slumping economy. Burlington Coat Factory, T.J. Maxx (TJX) and Marshalls also offer layaway on most items. Wal-Mart (WMT) offers it on jewelry only. Online, there’s Elayaway.com, which has partnerships with online merchants as well as a mall of select items from big-name retailers like Dell (DELL) and Home Depot (HD).

Toys “R” Us and Babies “R” Us jumped on the trend in October, offering layaway on big-ticket items in select categories, including bikes, televisions and strollers.

The advantages for retailers are clear. Layaway entices shoppers to spend more than they have available at that time, securing one sale and setting up payment-making and pickup visits when you could buy more, says Jack Taylor, a professor of retail at Birmingham-Southern College in Birmingham, Ala. It’s also an opportunity for stores to differentiate themselves from competitors with similar prices. Kmart’s layaway option, for example, may push a cash-strapped consumer to shop there instead of Wal-Mart or Target (TGT).

Retailers also profit from the layaway account itself. Consumers typically pay $5 to $10 per contract, with similar fees incurred for cancelling it. Retailers also have use of your deposit to invest or borrow against, helping them come out ahead even if you don’t complete the purchase.

But for consumers, layaway isn’t always such a clear win. “Not all consumers need it, or want it,” Taylor says. Consider these five factors before you sign up:

If you pay off your balance in full each month and can still do so with holiday purchases on the tab, there’s no advantage to layaway. But if you are or will be carrying a balance, layaway is cheaper than adding to your credit card debt, says Barbara Stark, the director of community development and education at American Debt Counseling, a nonprofit credit counseling firm.