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A purchasing agreement in which the the product is reserved for a period of time for the buyer

What is Layaway?

Layaway is a purchasing arrangement where a retailer reserves and stores an item for a customer, who has a predetermined period to pay for the Item in full. The customer typically enters into an agreement to pay the full price for the item within an agreed period of time, failure to do so will cause the item to be returned to the retailer’s shelves for other customers to buy.

In such cases, the customer’s money may be returned in whole, minus a storage fee, or forfeited in whole, depending on the initial agreement between the two parties. Layaways come with minimal risks for the seller, and it can be offered to customers with bad credit history or those with a restrictive disposable income.


Layaway Diagram


How Layaway Transactions Work

Different retailers impose different rules for layaway transactions. Typically, the basic process is as follows:

  1. The customer picks out the merchandise they want to put on layaway, and take to the concerned department. The item must be among the list of products allowed for layaway terms, such as electronics and cosmetics.
  2. If the item is approved, the retailer will ask the customer to make a down payment. Some stores require a fixed percentage of deposit that customers should pay, while others let you decide a fair amount of down payment that customers can afford.
  3. The next step is to choose the duration of the layaway plan. The retailer may allow a weekly, biweekly or monthly payment plan, depending on the price of the item and the amount of the customer’s disposable income.
  4. Make the scheduled payments gradually for the remaining balance according to the agreed layaway plan.
  5. Once the customer has completed the scheduled payments and has zero balance, he/she can pick up the items from the retailer. Some retailers will require customers to pay layaway fees, which is a minimal flat-rate charge for storing the items during the repayment period.


History of Layaway

Layaway transactions originated during the period of The Great Depression when a lot of people did not have enough cash to make full payments for their merchandise. The retailers, aware of the cash crunch, allowed customers to make payments bit by bit, and pick up the items when they completed paying the purchase amount in full. The transactions went on until the 1980s and 1990s during the advent of credit cards.

Plastic credit cards allowed customers to swipe their cards and take their merchandise on the same day, and delay the actual payment. Customers would then pay back the credit to the lenders plus interest over an agreed duration of time. Most stores discontinued the layaway plans due to decreased demand, as most customers turned to credit cards.

During the 2008 Global Financial Crisis, credit became scarce as more customers defaulted on their financial obligations. Banks also became bankrupt, and they were unable to collect defaulted debts and offer new credit to their customers. Stores like Walmart resumed their layaway services in 2011 due to the growing financial difficulties and the need to increase dwindling revenues.

In the year 2012 during the holiday season, many retailers resumed their layaway services, typically offering them for free as long as customers met some minimum relevant requirements. The services are still offered in many major retailers such as Walmart, K-mart, Sears, and FlexPay.


Online Layaway

Online layaways are common among e-commerce stores, and they allow retailers to receive scheduled payments that are deducted from the customer’s checking account until the payment for the item is completed. The customer is not required to physically visit the store to view the product and make payment, which helps save on fees related to storage. The items purchased on layaway terms are stored in distribution centers until the customer has paid the full amount.

The customer then picks the product at the distribution center. Alternatively, most retailers offer to ship to the customer’s registered address for free or at a small cost. Online layaway services are available for various products and services such as laptops, gym equipment, concert tickets, automobiles, homes, and vacations.


Benefits of Layaway

Layaways stand out among other financing methods for the following reasons:


Zero interest

When purchasing items through a layaway service, customers are not charged an interest on the price of the item. It makes layaway a cheaper option compared to credit card purchases that charge customers an interest of between 15 to 25%, and sometimes higher. The services only charge a flat-rate service fee to cater for storage, and it could be as low as $5 to $10.


Easy acceptance criteria

Layaway programs do not come with rigorous acceptance criteria like other financing methods. Retailers do not conduct credit checks as is the case with credit cards. The programs only require a proof of identification and a deposit for the item, making it an option for customers with past credit problems.


Downside of Layaway


Strict payment terms

Layaway programs come with strict payment terms, and customers must make scheduled payments within the agreed duration such as weekly, bi-weekly or monthly. Customers who fail to comply with these terms risk losing their items and incurring a cancellation fee.


Additional Resources

CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

  • Balance of Payments
  • Business Cycle
  • Inflation
  • Types of Buyers

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes and training program!