Is Layaway Worse Than Using a Credit Card?

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Despite the much-celebrated recent return of layaway to some large stores, Brad Tuttle of Time magazine reports that it may cost most consumers more in the long run than using credit cards. Tuttle cites a New York Times opinion piece by Cornell University professor Louis Hyman that says a typical shopper would wind up paying far less interest by using a credit card — even one with a relatively high annual percentage rate.

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Hyman gives the example of a mom who buys $100 worth of toys on layaway at Walmart. A $10 down payment is required, as is a $5 service fee. Then …

"Over the next two months she pays off the rest. In effect, she is paying $5 in interest for a $90 loan for two months: the equivalent of a credit card with a 44 percent annual percentage rate, a level most of us would consider predatory."

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That scenario is better than one in which the mom fails to pay off the balance, and then loses the $10 down payment as well as the service fee. In effect, she would be giving Walmart $15 and getting nothing in return.

Hyman suggests that the mom would have been better off paying for the merchandise with a credit card. And if the mom managed to pay off the bill within a couple months, then sure, that's the smarter option. That's a pretty big "if," though.

Tuttle goes on to explain that layaway is still the wiser option for certain types of shoppers — those who abuse credit — because the risk of racking up huge debt with layaway is little to none.

Read more at Time magazine.

In other news: States Adding Drug Testing as Hurdle for Aid.

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