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If you’ve heard of layaway, you may think it’s an old-fashioned concept, but it’s still available and can help people afford an item without breaking out their credit card.

Here’s how layaway works in a nutshell: You buy an item over time via installment payments. When you’ve paid the full price, you get to take your purchase home. There may be fees involved as well as the possibility of forfeiting your payments if you can’t keep up with them, but this technique can be a helpful tool in some situations.

In this guide, you’ll learn more about layaway so you can decide if it’s right for you, including:

•   What is layaway?

•   How does layaway work?

•   What are the pros and cons of layaway?

•   Which stores offer layaway?

•   What are alternatives to layaway?

What Is Layaway?

Layaway’s meaning is quite simple: You make a deposit, and a retailer holds your item (or lays it away) and collects the rest of the money over time. When paid in full, you collect your purchase.

Here’s a bit more detail on how layaway works.

•   The customer chooses an item that’s eligible for layaway and makes whatever down payment the store requires to implement a layaway plan. (This amount varies based on the retailer, and may or may not include a service fee.)

•   The customer then makes regular payments over time based on the retailer’s schedule. These payments may be made weekly, biweekly, or monthly. Online layaway plans let customers buy items according to scheduled deductions from their checking account.

•   At the end of the layaway plan period, when the item has been paid for in full, the customer takes their purchase home or receives it in the mail.

One additional point about how layaway works: If the customer makes late payments or cancels the layaway plan entirely, they may be charged a restocking or cancellation fee — and may also forfeit some or all of the money they’ve put toward the purchase already.

Why Use a Layaway Plan?

From the store’s perspective, layaway offers a low-risk way to make sales to those who might not otherwise be able to afford the purchase all at once.

Although the retailer might choose to charge a small fee to cover the item’s being tied up for the length of the layaway, if worse comes to worse and the buyer defaults, they can simply put the item back up on the shelf for sale.

From a buyer’s perspective, the attractiveness of layaway is even more obvious: It allows those who might not otherwise have the financial leverage to make large purchases affordably, over time.

Layaway is unique among financing options in that it often doesn’t involve interest, which means it can often be a more affordable choice than other types of credit or loans.

Pros and Cons of Layaway

Like any financial approach or product, there are both benefits and drawbacks to layaway plans.

Pros of Layaway

•   The consumer doesn’t have to go into debt to make a purchase they would otherwise not be able to afford. Using layaway can help you avoid charging an item on your credit card, which typically incurs high interest rates (which makes it bad vs. good debt).

•   Layaway plans don’t require a credit check — which also means that the consumer’s credit won’t be affected if they can’t pay the plan on time or in full.

•   Fees associated with layaway plans are generally low and often don’t include interest.

Cons of Layaway

•   Although they’re generally low, layaway plans do come with associated fees, such as service, restocking, and cancellation fees — and some of these may be non-refundable.

On the topic of fees, it’s worth noting that buying relatively inexpensive items on layaway can make the associated service fees proportionately costlier than they would be on higher-priced purchases.

•   If the customer makes late payments or fails to pay in full, they might forfeit some or all of the money they’ve already put toward the purchase (though this varies by vendor, so check with the individual retailer you’re considering for full details).

•   Repayment terms can be inflexible and it’s up to the vendor to set the repayment schedule.

•   Layaway takes time and patience; it’s an example of delayed gratification. It may be less attractive to those who want or need to take home the purchase immediately rather than waiting until it’s been paid in full.

Stores That Offer Layaway Plans

Layaway was originally offered back in the 1930s as a result of the Great Depression, then began fading away when the history of credit cards reveals that using “plastic,” as it’s sometimes known, became more common later in the 20th century.

The history of recessions tells us they do happen over the years, and the popularity of layaway surged again during the Great Recession of 2007-2009.

These days, many retailers still offer both in-store and online layaway, either for the holidays or year-round.

In some cases, you may only be able to implement layaway on certain products — generally more expensive ones, like appliances and jewelry.

Layaway programs come and go, but retailers that currently offer layaway include the following. Note that a couple of these retailers offer layaway purchases via a service called Affirm; more on that below:

•   Amazon

•   Best Buy

•   Big Lots

•   Burlington Coat Factory

•   Sears

•   Target

•   Walmart

If you’re unsure whether or not a retailer offers layaway, you can always ask!

4 Alternatives to Layaway

Here are some other ways customers can get their hands on items they might not be able to buy in a single purchase.

1. Similar Pay-over-time Plans

Some retailers, especially for online purchases, offer buy-now-pay-later or pay-over-time programs that are similar to layaway — rather than paying the full price today, you pay small installments over time.

On the plus side, customers can often receive their purchases before the payment plan has been completed.

However, some of these programs, like Affirm (a payment option available at checkout at many online retailers), can involve interest charges, particularly if borrowers are late on their payments or don’t complete the repayment plan in full.

2. Credit Cards

Credit cards are an obvious alternative to layaway plans — and using them, of course, means that the purchase can be taken home right away.

In fact, credit cards are sort of like the opposite of layaway: With layaway, you pay for an item and then receive it, whereas with credit cards, you receive it now and pay for it later.

(A quick vocabulary lesson: You may hear the term “buy now, pay later” vs. credit cards. If offered “buy now, pay later,” do your research to learn the details. These arrangements may be a kind of layaway. They often charge no interest, making them potentially a better move than using plastic.)

Of course, using credit cards almost always involves compounding interest charges, often close to or more than 20%, which is nothing to sneeze at.

Since it’s easy to carry a revolving balance while making minimum monthly payments, credit cards can quickly lead to a credit card debt spiral that can be difficult to climb out of.

3. Reconfiguring Your Budget

If being unable to make large purchases is more of a systemic problem than a one-time issue, some budget management may be in order.

Looking at how much money is coming in versus going out and then figuring out where cuts can be made and changing buying habits can be an important step. This can help you save up for the purchases you really need — and want — to make.

Shopping around to find the best deals can also help ensure that a purchase price is as low as possible, regardless of how you decide to finance it.

Recommended: Different Types of Budgets

4. Saving Up for a Purchase

Another option to layaway is to save up in advance until you have enough cash to go ahead and buy the item outright. Let’s say you want to buy a new laptop. You might automate your savings and have $25 transferred from checking on payday to your savings account (ideally, a high-interest one). Over time, the savings will build up and interest will accrue.

When you reach the amount needed, ta-da! You can go purchase your new laptop, without paying any interest or other fees related to buying it over time.

Recommended: Book Now, Pay Later Travel

Opening a Savings Account

If you’d like to start saving for a purchase, it can be wise to find a bank account that offers low or no fees and a solid interest rate to help your money grow faster.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

How does a layaway plan work?

A layaway plan works by a customer paying installments over time until they have given the retailer the full price of the desired item. At that time, the buyer receives their item. A fee may be involved, but typically there are no interest charges.

Is it a good idea to buy things on layaway?

Layaway can be a good idea in some situations. It can help some customers purchase an otherwise out-of-reach item and avoid using high-interest credit cards and incurring debt. However, one must be able to wait to get the item, and the buyer could be charged fees. They might also forfeit payments if they can’t keep up with the installments that are due.

What is the difference between an installment plan and a layaway plan?

The terms layaway plan and installment plan are typically used interchangeably to refer to buying an item over time. You make regular payments that are a fraction of the full price until the item is paid up. Then, the purchase is yours.

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A collective investment trust (CIT), also commonly called a commingled trust or collective trust fund, is a pooled investment fund that’s similar to a traditional mutual fund — but a CIT falls under a different regulatory path and may offer lower fees and tax advantages.

Similar to a mutual fund, a collective investment trust generally consists of assets pooled from investors — but in the case of a CIT the funds come only from qualified, employer-sponsored retirement plans, such as 401(k)s, pension plans, and government plans. They are typically not available to retail investors directly.

How a Collective Income Trust Works

CITs have grown in popularity over the years, likely due to their lower cost structures and the potential tax advantages they offer.

The goal for a collective income trust is to pool fund assets together into a single account (called a “master trust account”) and manage the investment funds in a highly diversified, low-cost manner. Although the trust is typically managed by a bank or trust company, the trustee can opt to hire an investment management firm in a sub-advisory capacity to manage the income portfolios.

The CIT investment process is fairly standard. Structurally, the bank or trust company will collect funds from various retirement-oriented investment accounts and commingle them into a single fund (i.e., the CIT), and thus become the trust’s “owner.” CIT investor participants don’t own any direct assets in the trust — instead they hold a participatory interest in the CIT fund assets (similar to the way investors hold mutual fund shares).

The trust, meanwhile, is free to invest in a wide variety of investment vehicles, including stocks, bonds, mutual funds, currencies, derivatives, or possibly alternative investments like commodities or precious metals. Strategically, the trust manager’s mandate is two-fold:

1.    Collect investment assets from participating investment plans and commingle them into a single fund.

2.    Manage the single fund like any mutual fund manager does — with a specific investment strategy, and goals and track the fund’s performance to ensure the fund is meeting its investment goals.

💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

Collective Income Trusts vs Mutual Funds

CITs are often compared to mutual funds because in both cases, investors’ assets are pooled and invested in a diversified portfolio of securities. Other than that, these two investment vehicles have some stark differences.

•   Individuals can invest in a mutual fund through an online brokerage or a personal retirement account like an IRA, but investors can only access CITs through an employer-sponsored retirement plan, pension plan, or insurance plan.

•   A collective investment trust is not regulated by the SEC but overseen by the Office of the Comptroller of the Currency (OCC) for national banks, or state banking authorities for state banks and the Department of Labor (DOL). As a result, a CIT is typically less transparent about its holdings than a mutual fund.

•   Unlike a mutual fund, a collective income trust is not required to register under bylaws created in the Investment Company Act of 1940. Thus, because a collective investment trust isn’t subject to the same operational, disclosure, and reporting rules of federal and state securities laws, the cost to invest in a CIT is generally lower than a mutual fund.

•   Whereas mutual fund fees are set by the investment firm as an expense ratio and are non-negotiable, some CIT costs can be negotiated.

•   CIT earnings are considered a tax exempt investment, not merely tax deferred as mutual fund earnings within an employer-sponsored plan might be.

•   A collective investment trust is set up as a trust and offered by a bank, trust company or other financial institution, whereas a mutual fund is offered by an asset management company.

A History of Collective Investment Trusts

Collective income trusts have been around for nearly a century. The first fund rolled out in 1927 on a limited basis. When the stock market crashed in 1929, CITs fell under additional scrutiny owing to the pooled nature of these funds, their lack of transparency, and the timing of the crash. Subsequently, CITs were significantly restricted by the government, which mandated that CITs could only be offered to trust company clients and through employee-sponsored retirement plans.

About 20 years ago, though, CITs began providing daily valuation and standardized transaction processing — in other words they began to operate more like mutual funds — which greatly increased adoption by defined contribution plans.

The real turning point came in 2006, when the Pension Protection Act provided for the use of Qualified Default Investment Alternatives (QDIA) for certain 401(k) plan investors. Target date funds, many of which include CITs, were designated as QDIAs, thus giving more investors access to CITs (although banks and trusts still couldn’t, and can’t, offer CITs directly to retail investors).

Since then, the cost efficiency of collective investment trusts has drawn the attention of many fund managers, and the use of CITs over traditional mutual funds in target-date fund series has grown.

Collective Income Trusts: Things to Know

By design, collective income trusts offer several unique features — and potential drawbacks — for qualified retirement plan providers and their investors:

CITs as fiduciaries

CITs must abide by the rules and regulations laid out in the Employee Retirement Income Security Act of 1974 (ERISA). That means CITs must meet minimum standards of conduct, like requiring CIT providers to give investors critical information such as plan features and funding. As such, a CIT trustee is held to ERISA fiduciary standards for the ERISA plan assets invested in CITs.

CIT’s long-term focus

Unlike a mutual fund, a CIT doesn’t need to distribute 90% of its taxable income every year (mutual funds are regulated investment companies and are required to provide annual taxable income distributions to investors.) That allows collective income trusts to hold investment funds in the trust, allowing those investments to grow in value over time.

No FDIC coverage

Unlike bank deposits, investor deposits in a collective income trust are not insured by the Federal Deposit Insurance Corporation (FDIC). While investments in a 401(k) are not FDIC-insured either, if deposits (e.g. savings, money markets, CDs) are covered by an FDIC-insured institution, then the deposits are as well.

CITs and rollovers

Collective income trusts don’t offer the same investment portability of mutual funds. Trust customers have to liquidate their positions in the CIT into a cash account before they can roll over funds adding an extra step to the account rollover process. Thus, CIT investors should work closely with their plan sponsors when rolling plan funds over to another retirement plan.


💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

The Takeaway

Although a collective investment trust is often compared to a mutual fund, the only two similarities of these vehicles is that they are both pooled investment portfolios, with funds from many investors commingled — and both are used in retirement plans. For now, though, a CIT is only available to investors through certain qualified plans.

Collective income trusts are becoming more common in the employment retirement plan universe, as more target date funds opt to include CITs. CITs are also quite different from mutual funds. They follow a different regulatory flow and are not overseen by the SEC. With more room to operate in a regulatory sense than traditional mutual funds, CITs can offer clients a unique long-term investment option tailored to their investment management needs, and in a cost-effective manner — all managed in a single investment account.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

FAQ

How is a collective investment trust valued?

A collective investment trust (CIT) is usually valued daily, and its valuation is a summation of the assets that it holds, like many other investment vehicles.

How do you start a CIT?

Starting a CIT is an intricate process, and is by no means simple. It would involve putting together several governing documents, assuring that the CIT is operating within the confines of state and federal laws, working with regulators, and then pooling investments — no easy feat.

Are CITs recommended to diversify a portfolio?

CITs may be recommended by a financial professional as a way to diversify an investment portfolio, as they comprise many different individual investments under one fund or trust.

Photo credit: iStock/izusek

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