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Does Layaway Pay?

You buy on installment. There's a service fee, but no interest

En español | Back in the day, layaway was the way to go if you wanted to buy something but were strapped for cash. You reserved an item in a store, paid for it in installments and took it home when you completed the payment.

Now, with many Americans finding ready money in short supply, layaway is making a comeback.

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Tammy Wyatt, a layaway specialist at Kmart (photo by Nell Redmond/AP Photo)- Stores let customers make installment payments toward holiday gifts to avoid adding to credit card debt, but they will incur fees.

Photo by ll Redmond/AP Photo

Read the layaway plan's fine print and think of the service fee as interest.

As the holiday shopping season approaches, major retailers Sears, Toys "R" Us, Wal-Mart, Kmart and Best Buy all offer plans, as do many smaller stores.

Generally, you're charged a service fee, typically $5, and have to make a 10 or 20 percent down payment. Other conditions may apply. At Wal-Mart, for example, Christmas layaway is restricted to toys, jewelry and electronics, items must cost $15 or more and the total purchase must be at least $50. Toys "R" Us charges $10 for cancellations.

Before signing up for a layaway plan, read the fine print. And do the math. It's true you're not charged interest, but try viewing the service fee as equivalent to interest.

For example, suppose you get a doll on layaway and pay $60 in installments over three months, plus a $5 service fee. You're effectively borrowing that $60. That $5 fee as interest for three months would equal $20 on an annual basis. In other words, you're getting a loan at a 33 percent interest rate. You'd come out ahead just putting the doll on a credit card.

On the other hand, in this age of overborrowing, plans that encourage saving and paying first can seem refreshing. You'll have the doll without the debt.

Also of interest: How bad credit costs you more. >>

Joan Rattner Heilman writes about good deals and where to find them.