Layaways act just like predatory loans

Stacks of coins

Just in time for the holidays, many big-box stores -- Walmart, Best Buy and Toys R Us among them -- are dusting off the layaway, in which a consumer pays for a product in installments and doesn’t get to take the item home until it’s paid in full.

To the naked eye, layaway seems like a smart alternative to using credit cards: After all, you’re not getting into debt, so there’s no way to get over your head -- right?

Unfortunately, layaway isn’t as good as it looks.

In order to take advantage of layaway service, you’ll generally need to pay a service or "initiation" fee of $5 or more.

That amount won’t be applied toward your purchase: It’s for the store to keep. And, in the event that you’re not able to pay for the item in full, you’ll be subject to another charge for the cancellation -- a full $10 at Kmart and Sears.

When these charges are equated to credit card APRs, they look a lot like predatory lending.

In a New York Times op-ed, Cornell professor Louis Hyman calculated that if a mother bought $100 worth of toys on layaway, the $5 service fee would be equivalent to a hefty 44% APR. If she wasn’t able to complete the payments, she’d lose out on her kids’ Christmas presents and be out $15 for a $90 loan.

That’s an interest rate of 131%!

If you’re low on funds, layaway is not the answer.

Look at your credit card options instead: Even if you don’t have much of a credit history, you’ll likely be able to qualify for a card with an APR below 25%.

That’s a lot better than layaway rates, and you’ll be working toward building a good credit score as an added bonus.

If you're looking for a card, you can compare credit card offers in our extensive database.

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