Monday, February 6, 2012

The genius of layaway

"The key to understanding the appeal of layaway is that most layaway programs require shoppers to make regular payments. Typically, you pick out the product you want, make a down payment, pay a service fee (typically five dollars), and then make regularly scheduled payments over a period of time until you’ve paid off the full price. There are no interest payments, and if you don’t make all the payments you get your money back, minus a cancellation fee. It’s the exact opposite of installment credit, where you get the product, and then pay for it.
From a strictly financial perspective, layaway looks foolish. As critics point out, if you were to put the purchase on a credit card instead and pay off the amount in full by the time that the layaway period would have elapsed, you could well pay less in interest than the five-dollar service fee that most stores charge. Alternatively, if you don’t have a credit card, you could put the money you’re going to spend on the product into a savings account or under your mattress. That would save you the service fee and eliminate the risk that you’ll have to pay a cancellation fee if you end up not making all the layaway payments. What this analysis leaves out, however, is the way people actually behave. Even people who can pay off their credit cards often don’t, since the whole structure of the credit-card industry is designed to make you irresponsible—as long as you make a small monthly payment, the bank will carry you. In fact, that’s what the bank wants: the profits in the credit-card business come from “revolvers,” people who pay a small amount each month and rack up big interest charges—far more than the five bucks they’d have spent on a layaway service fee. Layaway, by contrast, fosters virtue: it forces you to save, because if you don’t make the payment you don’t get the product. It’s what psychologists call a “commitment device,” a way to get yourself to do something that you want to do but know you’ll have a hard time doing if left purely to your own devices.

No comments:

Post a Comment