What is a layaway agreement?
A layaway agreement is a simple contract in which an individual agrees to purchase an item by paying the full price of the item in installments over time, however, the merchant retains possession and control of the item until all payments have been made and the contract is fulfilled. Once payment is completed, the merchant will turn over possession of the item purchased to the individual. As such, there is no interest associated with layaway agreements.
This form of contract is designed to provide those who are unable to obtain credit or financing, due to lack of credit or bad credit, with a means to purchase items for which they do not currently have sufficient funds. With layaway agreements, the individual makes payments towards the cost of a requested item, which the individual commits to purchasing at a later date, but the individual does not take possession of the item until payment has been completed and the contract is fulfilled . In this way, layaway agreements differ from most forms of credit or financing in which the individual receives the item immediately and then pays for the item over time, often with the payment of associated interest.
While layaway agreements represent a significant benefit to individuals who are unable to obtain financing, one notable limitation to this form of purchase is that most forms of layaway agreements will require a certain required payment amount for each payment interval and do not permit the flexibility to simply make partial payments if the individual’s financial situation changes or if the individual encounters unexpected expenses. As such, layaway agreements are not as flexible as other forms of credit or financing.
How does a layaway contract work?
"They’re paying about 10% more than they paid full-price last year," said Chris Bristol, a sales executive at Lake Success-based Newmark Knight Frank LLP, to The New York Times in an article about double digit price increases at his high end luxury moving and storage company. These are among the top tier ones who can afford comfort or security in the numbers in their accounts.
For all the great deals out there at the 99 cents store, you may still have some trouble making rent. It may sound like a lot, but it seems that even people living paycheck to paycheck (14.1% of tax filers made under $15,000 in 2009) are affording to live because of layaway.
This method of paying over time is equitably as old as the land. Layaway agreements are essentially each party’s promise to pay or deliver something in the future. In this case, the consumer pays deposits, usually over time, for the store to hold a good until the agreed upon price is delivered to secure it.
To form the contract, both parties must consent, to go ahead. In addition, a consideration (something of value) must pass between the two parties. The essence of a layaway agreement makes this true.
A contract is not final without consideration passing between each party. In this case it is easy to visualize exchanges. The retailer promises to hold the good and the consumer promises to pay the amount agreed upon.
For the layaway agreement to be enforceable, both the buyer and seller must have reached a mutual meeting of the minds. The terms of the contract must be clear so that no other interpretations are possible. This may seem trivial, but if litigation ensues, the courts will consider the factual circumstances surrounding the formation of the contract, including what likely led to the parties’ agreement.
Like any other contract, the terms of the agreement are final once both parties agree to the contract. Typically, a layaway contract will contain these specific terms:
The period clearly moving money down the timeline, showing the buyer and seller the terms of the payments. We see here that the buyer has agreed to make up to six payments, maybe because this is a big ticket item or the buyer simply can’t afford to pay for it all at once. Nevertheless, in this case, the buyer has agreed to start this payment schedule with the first payment of $40 (which may be non-refundable) on Feb 20. The total contract is for $400, so the buyer must deposit each subsequent payment by the indicated date.
For example, if the buyer was late with the April payment on Apr 30, since the buyer agreed to put up $40 for the first payment, the buyer would then be required to pay $60 instead of $50 for each of the next five payments in order to stay on track.
However, if the buyer had only agreed to make four payments, the buyer would be required to pay $100 each month, or whatever was meant by the second payment.
If the buyer were to default on the contract, the store may keep the amounts paid, exclude the buyer from making future purchases, or pursue some other course of action.
Advantages of layaway
One of the primary benefits for retailers is the increase in their ability to manage cash flow. By participating in layaway programs, retailers have the capability to sell more on credit, which means that retailers can increase their total sales. Furthermore, as layaway deposits are held in a segregated escrow account, retailers have reduced risk that customers will default on their payments because retailers do not actually have possession of the goods.
With layaway, customers can purchase higher-value items and spread the purchase price over time, without incurring debt charges or high interest rates. For example, CreditCards.com reports that an average consumer who buys a $600 television on a 12-month layaway plan would pay $55 in fees, as opposed to the estimated $107 in interest charges that would accrue with a store-branded card with 18 percent interest. Moreover, many reputable retailers offer flexible terms and low fees to encourage use of layaway.
A layaway plan also insulates customers from interest rate hikes and/or identity theft, which are associated with a credit card. Finally, unlike credit, with layaway, consumers do not face limitations on spending.
Disadvantages of layaway
Most retailers will charge fees for layaway agreements that typically amount to between 5% to 15% of the purchase price of items being placed on layaway, which can quickly add up exorbitantly for larger purchases. Additionally, be sure to check the cancellation policies, as these policies can vary widely between retailers.
Most retailers will only allow you to cancel your layaway agreement if you have made payments that exceed 10%. If your layaway contract does not specify a time limit for making payments, they may require you to make all of the payments on the contract before they will issue a refund. However, retailers will typically only attempt to refund the purchase price itself and will not refund or agree to refund any of the layaway fees. It is especially important to ensure that the retailer refunds the fees so as to avoid being charged significant fees for cancellation.
If a retailer charges more than 10 % of the total cost of the goods but is not willing to refund the contract fees, they may be in violation of state consumer protection laws and you could have a potential claim against them.
Legal issues with layaway
While layaway agreements can provide security and flexibility, they are not without legal considerations. This section outlines legal aspects of layaway agreements that you should be aware of, including disclaimers and limitations of liability, cancellation and refunds, work product warranties and returns, law and order, damages, miscellaneous terms, clarification on separate contracts, customer acknowledgements and repairs, recovery of attorneys’ fees and costs, healthcare coverage, limitations of liability, application of the consumer protection act and consumer protection notices.
As is true with many well-written agreements, this type will have some disclaimers in it. These disclaimers often state that the company is not responsible for any errors or omissions of any kind. This is where layaway agreement contracts are often slippery because there can be an argument made that the company misrepresented something. When that happens, in most states, it is considered a crime and there could be legal exposure. Make sure that you thoroughly read the layaway agreement to determine what disclaimers they are using. Always ask the company why certain things are excluded from liability. If their disclaimer does not make sense or is too vague, walk away.
A layaway agreement contract will have a cancellation and refund policy in it. Many times, a company will put sentences in your contract stating, "No refunds or exchanges." While making it very clear is a good thing, it is also helping the company put a big disclaimer there. If you agree to a layaway agreement contract like that, you simply cannot go back and request a refund or want to cancel and get your money back. If the store makes a mistake and sells your products to someone else, that is their fault . The best thing you can do is make sure that the company is not making any errors during the transaction.
The work that the contracted company does may be warranted as described in a contract. Publications that have pictures on them may state that the company will not warrant against any errors in the actual products you purchase. The number one thing to look out for is to see if the contract makes specific statements about what the company will or will not take back. That way, you do not rely on anything that the company says to you that is not in the actual written contract.
The contract may choose to specify a particular law that governs the construction, validity and enforcement of the agreement. Most of the time, that law will be the law of the state where the company is located. A good example of this is if the company is online, it could be the state of California. The contract can also require you to submit to binding arbitration if an issue arises. Binding arbitration is an agreement between you and the other party or parties to go to arbitration, rather than court.
If the company violates your rights under the layaway agreement contract, there is often a limit to how much you can seek in damages. For the most part, this is to discourage you from suing the company or keeping them out of court. Whether you can recover any damages from the company depends on how bad the company’s violations are and if the lawsuit is worth it.
This is a very short section at the end of the contract, but it is very important because it holds everything together. What you want to look for in this miscellaneous section is: When dealing with a layaway program or contract, it is important to be aware of what you are signing.
Layaway Tips for Consumers
Before entering a layaway plan, consumers should shop around. That means not only comparing the price of an item, but the terms of the layaway plan. That means what’s the down payment, how long is the plan, what payment schedule is required, and what happens if a payment is late or never made? Consumers should also read the fine print when shopping, and ask the clerk all kinds of questions until they understand the store’s layaway policy. Keep in mind that because layaway plans are automatically charged to the credit card if a consumer does not pay them off within a certain time, consumers should refrain from using a credit card for layaways unless they fully intend to pay off the balance by the end of the layaway period. Also, keep all records, from that first receipt to the last one, including any cancellation receipts and how you received the money back.
The history of layaway in retail
Layaway first emerged during the 1930s, as a way for retailers to encourage customers to buy goods even in tough financial times. At that time, the U.S. was suffering from the Great Depression, and people simply could not afford to buy what they needed up-front. Stores offered layaway as a way for people to pay for their purchases over time.
After the end of the Great Depression and World War II, the need for layaway declined, and it generally became less common through the 1970s and early 1980s. Many popular retail stores introduced credit cards, which again reduced the need for layaway. In fact, 84 percent of retail transactions in 2001 were paid for by credit card, with consumers owing an average of $2,000 on their credit cards—a far cry from the original concept of paying for goods in installments.
Since then, things have, however, shifted back toward pay-in-full. In 2008, an economic downturn set in. Consumers were once again unable to pay for goods up-front, and again , retailers began offering layaway as an alternative.
Sears began offering layaway again amid the financial downturn, and they say 750,000 customers signed up for the service just that year. Kmart also reintroduced layaway in 2010, and by 2012, 350,000 layaway accounts had been opened there.
One of the major advantages of layaway in the past was the fact that it did not normally accrue interest. The store held onto the item until it was paid in full, but the customer did not have to pay for it in full right away. In fact, in the 1990s, layaway plans gained such traction that even Wal-Mart offered layaway.
At the time, Wal-Mart restricted layaway plans to toys for kids under 12, but they have since expanded their offerings. Any major retailer can offer layaway without charge under the 1974 Credit Card Act. Under the act, no retailers are to extend credit for purchases less than $25. Although layaway can be popular during the holidays, many stores will continue to offer it year-round.