As you start to create your holiday gift lists, you will likely encounter retailers – including online retailers – that are offering layaway services as well as “buy now, pay later” plans (through online providers such as Quadpay, Sezzle, PayPal credit, etc). Before you take advantage of these programs, ensure you understand the implication they can have on your financial health.
Layaway came about in the 1930s but in the 1980s it all but disappeared as credit cards became easily attainable. However, following the Great Recession from 2007-2009, credit was more difficult to obtain and the financing terms less favorable, which caused the layaway programs to resurface. The general concept of in-store layaway is that you select items you want to buy but cannot pay for, the retailer will hold items for you and you will pay for the items on an interest free payment plan. Once the items are paid for in full, you can then go pick them up. With the rise of online shopping, you can now get the items as soon as you order them and pay for them in “affordable” installments.
“Buy now, pay later” programs can be even more appealing since you can take the gifts home that day and pay them off similar to using a credit card. Installments are automatically charged to your credit or debit card and can be paid off over a few weeks or months. “Buy now, pay later” is especially attractive if you have difficulty getting approved for credit.
Layaway and “buy now, pay later” plans sound simple and practical, but they are just as dangerous to your financial health, as well as the financial health of those around you, as shopping with credit cards.
These Programs are Still a Debt
Regardless of what name you give this type of service, making a purchase with anything but cash is debt. While it does not impact your credit score, layaway and “buy now, pay later” programs mean that you owe the retailer money. With layaway, some retailers will require a service fee and a down payment. Then, there are usually restocking fees if you cancel your order. Therefore, whether you get the items or not, you are paying the retailers something. While the purchases using “buy now, play later” programs are interest free, you may incur late fees and interest if you do not make your payments timely.
If you are putting something on layaway or using “buy now, pay later”, it typically means that you do not have the cash to pay for the item. This means that you either cannot afford the item or you did not budget for it. Either way, financing, even without impact on your credit score, is not going to help you on your journey to financial health. The terms of these programs are typically short (e.g. 8-12 weeks) which can add emotional stress to your health if you struggle to keep up with the payment schedule.
When it comes to holiday gifts, be realistic in your spending. Do not let materialistic pressures cause you to buy more items than you can truly afford. Sit down with your budget and determine how much of your disposable income you can comfortably spend on holiday gifts. If it’s not in the budget, do not buy it. You can make up lots of emotional justifications to buy gifts with anything other than cash, but none of them will enhance your financial health. If you do not have a budget, our Financial Advocates can help you understand your income, the three types of expenses and how to set up a budget.
A Teaching Opportunity
Using your credit card or taking on a short-term repayment plan can be solid strategies if you have a good grasp on your cashflow and are confident that you will be able to pay off your debt before incurring any interest charges or late fees.
Having said that, it is important to think about the message you are sending loved ones – especially your children and grandchildren – if you decide to take on debt to buy them presents during the holiday season. Are gifts that important that you should be spending money you do not already have? Is it really ok to carry debt and live beyond your means? If you are a grandparent, parent, aunt or uncle, or anyone with children or young adults that look up to you, remember that they are learning from your actions.
The holiday season has become so commercialized that there is a lot of pressure to buy gifts for relatives and friends. But there are many other ways to celebrate and show how much you care for others. How about making or baking something special for your loved ones? Cards, notes and letters of appreciation can be incredibly touching and meaningful. Getting together, watching something together, even virtually (through Skype, or Watch parties) are great ways to enjoy the holiday spirit without spending money you don’t have.
Budgeting is Key
The best way to tackle the holiday season is to establish a holiday budget. In November, identify how many gifts you really need to buy and how much disposable income you will have available. Divide the income by the number of gifts to get a rough idea of how much to spend on each. Then, plan the purchases out by pay check and buy the gifts when the funds are fully available. If you determine that your gift list far exceeds your budget, reevaluate who you are buying for and the type of selected gifts. If you cannot afford the gift ideas you had, find something less expensive that you know they will value.
Layaway and “buy now, pay later” programs can tempt you to make purchases that you otherwise could not afford. To avoid going into consumer debt, having a budget is your best line of defense. The next best line of defense is education. The more you understand personal finance and debt management, the stronger your financial health will be. Our Financial Advocates and Webinar hosts are eager to give you the tools you need for financial success. Call us today for help getting through this holiday season at (800) 642-2227.