As Black Friday looms on the calendar, one buying option that consumers should think twice about is layaway.
The crawling economy has shoppers prepared to do almost anything for those door-buster deals. From standing for hours in predawn lines to clipping stack upon stack of coupons, so how can consumers know if they are saving money – and their sanity.
One politician took it upon himself to make sure consumers are the ones getting the best deal not retailers. U.S. Sen. Charles Schumer came out recently to ask retailers to be more transparent when it comes to the fees associated with layaway programs.
“These layaway programs are nothing more than hideaways for sky-high interest rates that consumers would never tolerate with a credit card,” Schumer said.
Take for instance that a Rock n’ Roll Elmo doll requires a $5 layaway fee and a 10 percent down payment each month. This can equate to a credit card company charging more than a 100 percent annual percentage rate.
Sen. Schumer is asking retailers and their members to more clearly present and disclose their layaway fees and policies. Sen. Schumer said if he does not get the cooperation he is looking for than he would take his complaint to the Federal Trade Commission under the context of deceptive or misleading business practice.
However, for many lower income Americans who do not have access to credit, layaway is an only option for those holiday gifts.
Consumers often fail to see the connection between retailers and credit card companies when they use the terms “fees” as opposed to “interest rates.”
For example, many states have a set interest rate they can charge for their credit cards, anywhere from 15 percent to 35 percent. There is no limit to how much a retailer can charge for layaway “fees.”
"As a financing option, layaway is decidedly worse than most credit cards," said Professor Louis Hyman of Cornell University to The New York Times.
Yet, when a shopper purchases $100 worth of Christmas toys they typically make a down payment of $10 and pay a $5 fee. Over the next two months, they pay off the balance.
In actuality, they are paying $5 in interest for a $90 loan for two months. This is the equivalent to a credit card with a 44 percent annual percentage rate.
Moreover, the rate would be higher if the purchaser was not able to finish the payments. The company would return the money minus all fees that would equate to a $15 charge for a $90 loan. This produces a percentage rate at 131 percent.
“The holiday season is supposed to be about giving and not taking, but these layaway programs are taking advantage of people and charging them outrageous interest rates, under the guise of making it easier and more affordable to shop.” Sen. Schumer said.