In finance, the term layaway denotes a contract in which a buyer pledges to pay for a purchase in advance – normally via a series of partial payments over a predetermined period of time. The seller, for their part, pledges to reserve the product being purchased via the layaway arrangement.
A layaway agreement normally requires the buyer to make an initial down payment. The remainder of the cost of the desired purchase is divided into a series of recurring payments over a certain term. Layaways may also be open, without a fixed term and allowing the buyer to make flexible payments when they are able, although this arrangement is less common. In any case, the buyer must pay the pre-agreed price for the desired purchase in full before they can take possession of the purchase.
Layaway agreements are primarily used in retail. They are often used in situations when the creditworthiness of buyers is poor or difficult to determine. Because the seller collects payment in full before delivery of the asset, they do not carry any risk. Sellers may also add a layaway charge to the cost of purchases made via layaway, and the payments made in advance of the sale positively impact the sellers cash flow.
The primary benefit for buyers is that they can normally lock in the price of a purchase ahead of delivering payment. This makes them a useful solution for the purchase of goods or services which may become more expensive in the future. However, it is important to note that in the case of consumer goods, the cost of goods typically decreases over time. Because no interest is earned by buyers on money paid in advance of a purchase via a layaway agreement, saving and investing money in savings accounts or other interest-bearing investments until you are able to pay for the purchase in cash normally makes more financial sense.
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