Wal-Mart’s press releases suggest that the restoration of the layaway program, which was discontinued in 2006, is meant to help its customers “budget” so that Christmas can be “worry-free.” The company is partly playing on the economic insecurity of its customers, and partly on the national nostalgia for the days before credit-card debt. But the truth is, the program is a bad deal for everyone — except Wal-Mart.
Wal-Mart is not alone in the return to layaway; Sears and Toys “R” Us also have revived their programs. The plans first became common in the 1930s. Stores that catered to the well-to-do, like department stores, offered no-interest credit to be paid off at the end of the month. But store owners feared extending such offers to lower-income shoppers, believing they were likely to be slow to repay, or even default on their debt, which would tie up the store’s working capital.
Stores didn’t want to turn away lower-income customers, though — hence layaway. It allowed them to impulse shop and take advantage of sales, but it also protected the store’s capital. And if shoppers couldn’t pay the layaway, the store could resell the goods.
But layaway fell out of favor during the last decade as lower-income Americans gained access to credit. It was better for stores, too, since credit cards are easier to administer — most of the work is handled by the card company, not the store. Most stores, except for a few holdouts like Kmart, eliminated their programs.
At first glance, the return of layaway makes sense. Fewer lower-income shoppers have access to the sort of credit they once did, and many can’t afford big purchases outright. And there is a moral appeal as well: customers paying layaway are effectively saving toward something, a reward they will receive only if they meet their goal, rather than paying off the debt on a purchase they have already made.
Nevertheless, as a financing option, layaway is decidedly worse than most credit cards. Imagine a mother going to Wal-Mart on Oct. 17 and buying $100 worth of Christmas toys. She makes a down payment of $10 and pays a $5 service fee. 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.
In comparison, even a card with an 18 percent A.P.R. would charge only half as much interest — and she could take those presents home the same day.
Then consider what would happen if she couldn’t finish all the payments. Wal-Mart would give her the money back, less $10. If she borrowed that $90 and paid $15 in interest for two months, she would have the equivalent of a jaw-dropping interest rate of 131 percent.
These numbers assume she borrowed for the maximum amount of time, two months, and put double the minimum required amount on layaway. But if that period were shortened or the shopper put the minimum amount on layaway, those rates would go up proportionately.
With rates like that, why would anyone participate in layaway? Retailers talk about the plans as a way to give consumers more choice, but in fact it’s the result of the opposite: the desperation arising from many Americans’ inability to borrow, save and, most important, earn.
Credit, after all, is a great deal, giving us the use of something today that we pay for tomorrow. One could also put the money that would go to layaway into a savings account, where it would earn some interest. But non-predatory credit is hard to come by these days, even for middle-class shoppers, and, according to the 2007 Survey of Consumer Finance, even before the crisis 25 percent of lower-income Americans had no bank account at all.
Indeed, rather than reminding us of the morally upright, pre-credit days we left behind, the return of layaway should remind us that in many ways we’re still stuck in that decade: since the early 1970s, the median male wage has declined. Any rise in household earnings has come from more women entering the marketplace, not from higher wages.
It didn’t feel that way, of course, because the expansion of credit to moderate- and lower-income Americans made us all believe we were getting richer. And, not surprisingly, as better options emerged, people dumped layaway plans. The programs’ return, then, isn’t a signal that consumers have more choice. It’s a signal that in today’s cruel economy, there’s no choice left.
Louis Hyman is an assistant professor of history at Cornell and the author of “Debtor Nation: A History of America in Red Ink.”