The return of layaway plans this holiday shopping season is raising concern that the break from credit cards might actually cost consumers far more.
For example, a rock 'n' roll Elmo doll that requires a $5 layaway fee and a 10 percent down payment for a month can equal a credit card that charged more than 100 percent interest, U.S. Sen. Charles Schumer said.
Schumer is asking major retail associations to direct their members to more clearly present their layaway fees to customers. The Democrat says the ultimate cost of a layaway with a $5 fee can equal 40 percent interest over a month or two for many common purchases compared to the annual rates of most credit cards.
He said if stores don't better present the cost of layaway purchases, he will ask the Federal Trade Commission to determine whether the increasing use of layaway is a deceptive or misleading business practice. Historically, stores started dropping layaway plans in the 1990s in part because of these costs and inconveniences.
But stores have noted that any fee they charge shouldn't be seen as a windfall.
Often the fee covers the cost of handling a layaway account, the cost of keeping workers available to provide items when the layaway is paid off, and the cost of storing items for weeks and disrupting what could be a faster turnover. The fee can also be a "restocking fee," which covers the cost of returning the item to the shelves if the layaway isn't completed. In addition, retailers say the feel helps reduce the loss if a layaway isn't completed and item can't be immediately resold.
Schumer said most states limit credit card interest at 16 to 35 percent, but layaway plans can end up costing more in borrowing costs for consumers who often have a lot of credit card debt.
"These layaway programs are nothing more than hideaways for sky-high interest rates that consumers would never tolerate with a credit card," Schumer said. "The holiday season is supposed to be about giving and not taking, but these layaway programs are taking advantage of people and charging them outrageous interest rates, under the guise of making it easier and more affordable to shop."
Schumer said late Friday that he is sending letters to the Retail Industry Leaders Association and the National Retail Federation asking them to advise their members to clarify layaway costs. The association had no immediate comment and the federation declined to comment until it could research Schumer's concern.
Major retailers nationwide are reviving the layaway plan that started during Great Depression as a way to help low-income people without access to credit to buy presents during the holidays.
"As a financing option, layaway is decidedly worse than most credit cards," Professor Louis Hyman of Cornell University recently told The New York Times. Hyman is the author of "Debtor Nation: A History of America in Red Ink."