Alex Tabarrok is perplexed by the popularity of the purchasing plan:
The typical layaway plan requires a deposit of 10 to 15 percent of the price of the good, say a new TV. If the consumer pays the balance over the following 10 to 12 weeks (i.e., by Christmas) they can pick up the good. If the consumer doesn’t pay the balance, they get a refund of payments made less a service fee. Walmart and Kmart advertise their layaway plans heavily. I am shocked, however, that so-called consumer advocates also have good things to say about poor people lending big corporations money:
Consumer advocates say layaway is a great way to manage a major purchase and stick to a budget, allowing consumers to spread the cost of an item over a number of payments without running up a lot of costly debt. …“The fees, if any, are generally nominal and probably much lower than the interest you’d pay if you purchased those things with a credit card and didn’t pay off the bill for several months,” said Tod Marks, senior editor and shopping expert at Consumer Reports.
Stop the insanity! The relevant comparison is not to buying on credit but to saving. Instead of lending Walmart money, get yourself an old-fashioned piggy bank and avoid the cancellation fee and the hassle of going to the store to make the periodic payments.
Erik Loomis defends layaway with a real-world example:
Let’s imagine a situation for layaway. You are 11 years old. It’s July. Your family doesn’t have much money. Getting new school clothes is a big deal because you don’t get very many new clothes in a year and you want to wear them on the first day of school. Your parents are really worried about this. They want to buy you the new clothes. They also know that they will have a really hard time actually saving the money to purchase them all at once. So they put them on layaway at the Target or Walmart and make the payments, hoping to have them all paid off before school starts.
How would I come up with this scenario? Because I was that 10 or 11 year old and my parents used layaway to get me those new clothes I wanted. In fact, in the scenario I am recalling, they actually couldn’t make all the payments and I really wanted those clothes and somehow we talked the store into giving us some of the clothes up front and breaking up the layaway, which probably only worked because I was there and nearly hysterical that I would have to wear old clothes on the first day of school. In a so-called rational economic world, layaway might not make sense. In the real world that actually people live and operate in it makes a ton of sense, even if it is bad economics.
Suppose you put a $300 item on layaway for four months. What’s the opportunity cost? Roughly speaking, it’s the interest you could have earned on that money, which for most of us is around 2 percent or less these days. That’s a grand total of one dollar over the course of four months. Frankly, if layaway really does provide a psychological prod to make the payments, it’s not a bad deal at all.