A U.S. senator gives layaway advice on Black Friday

U.S. Sen. Richard Blumenthal sounded the alarm Friday about the resurgence of layaway plans, saying they often are far more expensive for consumers than even the highest-interest credit cards.

Sen. Richard Blumenthal and Elmo.

The warning by the former Connecticut attorney general might seem to be a timely sound bite for Black Friday newscasts, but it comes a month too late to be useful to many layaway shoppers.

The day after Thanksgiving is the symbolic start of the holiday shopping season, but most layaway plans require purchases at least two months before Christmas.

Layaway shoppers at Walmart, the nation's largest retailer, are already paying off their purchases, which must be paid in full and picked up by Dec. 16. Walmart offered an eight-week plan for a $5 fee, beginning Oct. 17.

Sears offered shoppers eight-week plans for a $5 fee and 12-week plans for $10, plus a down payment of at least $20. Toys 'R' Us, Kmart, Marshalls, Best Buy and TJ Maxx are among national retailers offering layaway this year.

The $5 service charge is typical of the plans offered by several major retailers, who brought back layaway plans to keep bringing in shoppers in a down economy. For Walmart, layaways are back for the first time since 2006.

Blumenthal, a Democrat elected in 2010 after 20 years as state attorney general, said that a $5 fee is enticing, but consumers should be aware that it is steep, compared to the cost of a credit card.

In letters to retailers, the freshman Democrat said he is joining Sen. Charles Schumer, D-New York, in asking retailers to disclose the fees for layaways in a manner similar to credit cards, by calculating the "APR" or annual percentage rate. If they do not, he warned that he and Schumer would ask the Federal Trade Commission to investigate.

"Come clean and tell consumers what the real charges are," Blumenthal said. "Stop labeling them as fees, rather than interest rates. And provide affordable options to consumers."

In a news conference at the Legislative Office Building in Hartford, Blumenthal held aloft a plush "Elmo" toy still in the box, saying that the $69 purchase could cost a consumer the equivalent of a 105 percent annual interest charge.

Schumer also used the example of a $69 Elmo to make the same points at a Nov. 13 news conference. Schumer and Blumenthal each quoted Louis Hyman, who warned about layaways in an Oct. 11 op-ed in the New York Times.

Hyman, a professor at Cornell, wrote "Debtor Nation."

Getting to a 105 percent APR appears to require some creative math.

To reach an annual percentage rate of nearly 105 percent for buying Elmo on layaway at Walmart, Blumenthal added a required 10 percent down payment of $6.90 to the $5 service fee to get a two-month charge or "interest" cost of $11.90 on the $69 purchase.

That comes to 17.24 percent for two months, a monthly rate of 8.62 percent and an APR of 103.5 percent. But should the down payment be likened to an interest charge, when it is a payment that reduces the principal?

Blumenthal said it was fair to include the down payment, because the money is not available to the consumer for the duration of the layaway or loan.

Using the same formula without including the down payment as a cost of borrowing still yields an annualized percent rate of more than 40 percent. There is little question that a consumer would be better off using a credit card.

David Tovar, a spokesman for Walmart, did not disagree, calling layaway an option for those without credit.

"We brought back layaway for this Christmas because our customers asked for it, and it's a program we know they're excited about and responding to," he said. "We believe layaway is a great option for many of our customers who do not have access to traditional lines of credit. We also believe customers who live paycheck-to-paycheck and may be without access to credit should have an affordable way to deliver Christmas for their families."

Tim Phelan, president of the Connecticut Retail Merchants Association, said that retailers do not calculate an APR for layaway plans, because consumers are not incurring a debt when they make a purchase on layaway.

"It is not the same as credit. With credit, you walk out with the item," Phelan said.

A consumer might literally take a year to pay off that credit card debt, making the annualized percentage rate a relevant measure, Phelan said. With a layaway, there is a flat fee on a payment plan that must end before Christmas.

(Layaway does have other pitfalls: Failure to complete the layaway payments at Sears, for example, means forfeiting the service fee and a $10 cancellation charge. But it does not lead to compounding interest payments.)

The APR calculation does not seem to be required by either the federal Truth in Lending Act or Connecticut law.

Blumenthal says calculating the APR on a layaway allows consumers, especially those with the option of using a credit card, a way to measure whether credit or layaway is the better deal.

"The APR provide an apples-to-apples comparison about what the other options are, the relative cost," Blumenthal said.

Phelan said the comparison is unnecessary, as long as the retailer plainly discloses all fees, including any cancellation or other penalty for failure to complete the layaway purchase.

"We found most customers expect there will be a service fee," Phelan said. "The service fee is disclosed in a variety of ways, based on the retailer."

The Black Friday news conference on a consumer issue is another reminder that Blumenthal intends to work many of the same issues as U.S. senator as he did as attorney general.

"Consumer protection remains very much a passion and a focus for me, no question about it," he said.

Blumenthal said he is working as senator on a broad range of issues.

"Emphasizing consumer issues are one small part, even though they are a passion of mine," he said.