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Pick It Out Now, Pay for It Later: Layaway's Back

Thanks to the soft economy, it's suddenly offered by stores everywhere

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Five years ago retail chains that still offered layaway plans were pretty much phasing them out. Not only were shoppers flush with the riches from their home-equity lines of credit, but even jobless twentysomethings were whipping out their platinum cards. The need for a store-administered deferred-payment plan like the layaway had largely disappeared, gone the way of coupon books and S&H Green Stamps.

What a difference a recession makes. As the holiday shopping season approaches, not only has layaway made a comeback, but it's also arguably bigger than it was in the old days. Sears, Kmart, Marshalls, Best Buy, Burlington Coat Factory, T.J. Maxx, and Walmart are just some of the brands to trot the offering back out of the barn. "It's something that retailers are starting to value again," says National Retail Federation communications director Kathy Grannis. "They know that shoppers are looking for more than just good prices."

Introduced in the era that preceded credit cards, layaway plans require a deposit on a desired item, but then let shoppers space out the remainder of the payments on an interest-free basis. The option historically appealed to low-income consumers who lacked both cash and credit for large purchases. But with unemployment hovering at 9 percent and a pervading funk of economic insecurity in the air, layaway suddenly looks good to middle-class shoppers too.

"We know that consumers continue to look for ways to stretch their dollars during the holiday season," says communications manager Katie Reczek of Toys "R" Us, which recently expanded its layaway plan after introducing it only for "big gift" items in 2009. "Hundreds of thousands of items have been put on layaway in our stores," she says.

Analyst Peter Benedict of Baird equity research adds that Walmart abandoned its layaway plan five years ago because "it wasn't very profitable. But with top-line growth more difficult to come by these days," he says, "they have brought it back."

In addition to its attractive financing structure (a relatively modest fee is usually the only add-on cost that shoppers have to deal with), layaway plans also afford shoppers a certain peace of mind. "Parents can reserve the year's hottest toys early in the season, make a series of small payments, and know they're ready for the holidays," Reczek says.

The plan isn't without its drawbacks for consumers. Unlike a credit card purchase, layaway lets shoppers take their items home only after the final payment's been made. But Grannis says even consumers with good credit are giving layaway a look. "They won't have that 10 percent-18 percent interest rate," she says. "And who wants to see that big bill in January, anyway?"