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Struggling Economy Resurrects Layaway

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Struggling Economy Resurrects Layaway

Economy

Struggling Economy Resurrects Layaway

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FARAI CHIDEYA, host:

From NPR News, this is News and Notes. I'm Farai Chideya. When's the last time you put something on layaway? What about hawking that diamond ring in the pawnshop? These are some of the harsh realities emerging in our struggling economy. In a few minutes we're going to talk a Detroit pawnshop owner, but first we'll turn to Keith Reed. He's a reporter for the Cincinnati Enquirer and one of our regular contributors. Hey, Keith.

Mr. KEITH REED (Reporter, Cincinnati Enquirer): Hey, Farai. How's it going?

CHIDEYA: It's going OK for me. But you know, domestic and international stock markets are still volatile. And it's also a time when a lot of people start looking for that holiday job, whether it's a student or whether it's somebody picking up a second job. You can be Santa's helper. You can be the one, you know, making sure the stores are stocked up, but not so much right now. Retail just lost 40,000 jobs last month. It's the tenth month in a row when that sector has lost jobs.

So people still want to buy. A lot of folks, though, have maxed out on their income, and there's something called layaway, which I certainly remember. Tell us what it is.

Mr. REED: Well, I remember layaway, too. Layaway is essentially - it's almost the opposite of a credit card. If you have a credit card you can borrow. You walk into a store. You plunk down your plastic, and you pay for it with that card. You basically borrow the money on the spot to buy what you want to buy, and you take it out of the store with you.

With layaway, you go into a store and you say, I really like that TV, and I'll give you 10 percent down on the television, and I'll come back every week or every couple of weeks and put down more money on it until it's paid off. At the point of which it's paid off, you then carry that item out of the store. So it's a little bit more complicated of a transaction than is paying by credit card. But it also works out to be cheaper because you don't pay the more exorbitant interest rates that you would when you lay something away. You basically just pay a service fee of 10 or 15 bucks or some percentage of the item, and then you pay it off and then it's yours.

CHIDEYA: So it sounds like in a lot of ways, financially layaway is a much better deal than carrying credit-card debt. Why do you think people have become so reliant on using credit cards as the means to get something right away?

Mr. REED: For two reasons. Number one, it's - layaway is financially better, probably, for the majority of buyers, but it doesn't satisfy the instant gratification that we've become accustomed to. Once you've got a credit card in your pocket, again, the difference is you can walk into a store and get exactly what you want as long as you have that money available on your credit card. If it's 1,500 bucks or if it's five bucks, you can plunk the credit card down. You can pay. You can charge it, and then you worry about paying it off later. And it seems - it seems like it's a little bit easier to do it that way because hey, you know, the credit card company will send you a bill instead of for 1,500 bucks, it will send you a bill and you pay $100 every month. What you don't realize is that you're paying, you know, anywhere from, you know, 13 to 18, even 20 or 30 percent depending on your interest rate on that purchase. So you pay a lot more over the long term, but you get what you want right upfront. And it's instant gratification that people enjoy.

With layaway it's the opposite. You have to actually pay the entire thing off - that whole, entire 1,500 bucks or $2,000 or whatever the cost is of the item that you're buying before you take it home. Layaway is also something that stores don't like to do or haven't liked to do for a long time because the store, obviously, wants to get all of its money upfront. They don't want to hold a piece - hold something in inventory when they can be bringing in a new item that they can sell to somebody else if they've got to keep, you know, 10 percent or 15 percent of their store's inventory in the back waiting for someone to come in over the course of a month or two to pay it off. Obviously, their ability to bring in new merchandise and to sell it to somebody else is affected, and they like to realize their revenue right upfront, not over the course of a couple months.

CHIDEYA: Is there an upside to the era of layaway coming back? I mean, it sounds as if layaway is something where you've got it or you don't got it. Meaning, by the time you walk out of the store you either had the money to pay for this or you didn't have the money to pay for it, and it's still left in the store as opposed to credit cards, which make you think, well, I think I have the money to pay for this, and I'll pay for it later. You know, is there a kind of sober realism that actually is positive for people in the return of this kind of method of buying gifts for the holidays as opposed to the credit card method?

Mr. REED: Yeah, I think so. Somebody asked me about a week or so ago and he said, what do you think the biggest change is going to need to be for young professionals - for our generation, you know, coming along economically? And I said, the biggest change is really going to have to be that you are going to have to wean or we are going to have to wean ourselves off credit almost entirely. I mean, except - with the exception making a big - a major big-ticket purchase like a home or a car or something that you can't - absolutely can't afford to pay for in cash. People are going to have to just start to live within their means and find ways to pay cash even if it's paying cash over time for the items that they want and not buying things on credit. not buying shares of stocks on margin, not borrowing and paying interest on purchases that they make.

To the extent that layaway facilitates that, then I think it's a positive thing. But then there's another school of thought that goes, listen, if you need to lay something away, you probably should just save for it anyway and just walk into the store and pay cash. And I don't really think that layaway is going to become as popular as it was if you go back a few decades or even back just 15 years or so. Stores still are in the business of wanting their money upfront. Shareholders demand to see that the revenues are coming in, and when you start to see people laying more things away as opposed to paying for things upfront, stores aren't happy with that. So there's a limit to how far this can go.

CHIDEYA: One thing that happens is you see people doing layaway around the holidays, trying to get those Christmas gifts. There has increasingly been numbers of families who are debating whether or not you should even be giving gifts at a time like this. Maybe, you know, something small and token, but like not that huge gift that you normally would give. What kind of - how do you have that debate within a family without it turning crazy? Because there are times when, you know, you have people getting all upset. But of course we have to give a gift to everybody in the family, and there's none of this like one gift per family or none of this pull out of a hat. And other people are like, well, I grew up pulling up out of a hat. Pulling out of a hat is fine. There's all these different theories about how you give gifts. So how do you deal with that on a very practical, finance level when people start thinking about holidays coming up?

Mr. REED: I think this holiday season and really the next few months, again, are going to be - it's just going to be sobering for a lot of people. There's a point at which people are going to begin to realize how - just how far above their means they have been living for a long time. And I don't think people are truly ready to accept that. But I think as the economy tightens and more people start to lose jobs and it just becomes more and more difficult to borrow and interest rates go up on credit cards, people are going to start to realize that, you know, we can't buy everybody and their mama and their cousins and their kids a gift for Christmas. It's got to be we got to do for our kids. We've got to do immediate family and one or two other people, and we've got to pay for it all in cash. So whatever you can do or whatever we can do to afford, that has to be it. So there's going to be a little bit of pain.

I mean, you can make it fun. You can do things like you said. Go back to pulling out of the hat. Have the kids pull out of the hat. Have, you know, do more family gatherings where everybody brings something to eat and talks and watches a movie as opposed to everybody coming over with the, you know, a hundred or $200 gift for everybody in your family. There's all kinds of different ways that you can do it. I mean, I grew up in a family that didn't have a lot of money, and everybody didn't get a gift from everyone else every year. Or if you got something, maybe you got something smaller. And that's not a bad thing, and that's probably the type of thing you're going to see people reverting to this year, but not without some pain and probably not without some arguing between some husbands and wives and some cousins and some mamas and some big mamas and some everybody else, too.

CHIDEYA: Let's throw the government into it. Congress is considering another multibillion-dollar stimulus package, and the Fed chief backs it, but let's say that taxpayers do get another stimulus check. Is that going to go into things like consumer goods or are people going to throw that straight at the credit card bills or into the savings accounts? You know, explain the patterns that people seem to have in taking the stimulus checks, which are meant to be spent, or from the government's perspective would stimulate the economy if they were spent and what people actually do with them.

Mr. REED: Let me take a step back and say that a lot of people - a lot of economists think that another - just like the first one - that another stimulus check is just a red herring because, of course, the government is doing a lot of borrowing and making a lot of promises for a lot of money to be given to Wall Street, to be given to the mortgage industry, to be given to homeowners who are in trouble. And just, you know, coming up with another few hundred dollars' check to stimulate the economy a little bit more is just robbing Peter to pay Paul.

That said, I find it, I find it a little bit interesting that in talking to some blog readers and some people who I just sort of casually polled and asked, what would you do with another stimulus check? The answers were very, very different than what they were a few months ago. Then it was, you know, probably 60-40 in favor of taking that money and running out to buy something that you didn't - that you wanted that you hadn't been able to buy. And you know, worry about the rest later or, you know, hey, I'm still getting the tax return anyway, so this is cool. I can take a little bit of this money and, you know, purchase something and pay some bills off later.

This time around, almost no one - almost no one that I asked that question to came back and said, you know what? I'm really looking forward to a TV or I know that clothes are going to be on sale this year around Christmas time, or, you know, I'm looking forward to buying something. Everybody that I talked to said, I'm going to take that money and put it into savings. I'm going to take that money and pay a bill. I'm going to pay down all my credit cards. And I think that's an indication of where the economy is and where people's consumer confidence is right now in the country.

CHIDEYA: Keith, you know, just quickly, isn't that exactly what the government doesn't want?

Mr. REED: That is exactly what the government doesn't want, but it's probably what we need. I mean, I think it's - you know, we have to get to a point, honestly, Farai, where people start to say, you know, we live in a society that is based far too much on consumerism and far too much on consumption. I mean, a lot of the fundamentals of what's happened to us, you know, the fundamentals of the economy are strong, right? No, they're not strong when everybody is borrowing to buy stuff so they can borrow to buy more stuff. It gets to a point where it's just simply not sustainable anymore for the bulk of economic activity or for the core of what keeps the economy afloat to be people borrowing money to pay for things.

CHIDEYA: Right. Well, you know what?

Mr. REED: It's just not good.

CHIDEYA: I'm going to go ahead and jump in because we're going to keep talking. We're going to take a quick break. We're going to talk about pawnshops and the industry making a comeback. What does that really say about where we are? So Keith, hang on, and we're going to talk about that. Plus, ahead, the mother and brother of Academy Award-winning actress Jennifer Hudson were found shot to death last week in Chicago, and they fear a young child found dead could be her missing nephew, as well.

(Soundbite of music)

CHIDEYA: This is News & Notes. I'm Farai Chideya. We are back with reporter and economics expert Keith Reed, and we've been talking about trends in retail, including the revival of layaway plans. But we're also seeing pawnshops getting a lot more business. We're going to bring a new voice into the conversation. Tony Aubrey is a successful pawnshop owner in Detroit, Michigan. Tony, thanks for joining us.

Mr. TONY AUBREY (Pawnshop Owner, Detroit, Michigan): Hi, Farai. How are you?

CHIDEYA: I'm doing great. So just making the point that Keith is still with us, as well. But Tony, we're going to start with you. I've been reading all these stories about high traffic into pawnshops. If there's tough times, people seem to want to sell, and you know, certainly, if you want a good deal on something you might want to go by and see what's there. You're in Detroit. It's been hit so hard by auto industry issues, foreclosures. What are people pawning when they come into you?

Mr. AUBREY: You know, Farai, our industry, I've been in this a long time, and our industry has changed over the last several years, mostly due to inflation and unemployment locally. You know, as you said, the Detroit area has been hit very hard. We're on the east side of Detroit, just north of Detroit. We have two locations, one in an auto city called Warren, Michigan, and then the other one is in Roosevelt. So we get a lot of Wayne, Macomb and Oakland County folks. And what's happening, the biggest change that I see over the years is the dollar amount has changed, the demand has changed because now most families, if they're fortunate, they have two people, two-person income.

Their struggling could be for several reasons. The subprime crisis, obviously, took a big hit on homeowners. The gasoline situation in the last few months, I've had - I can't tell you how many people every day come in and say, I need a hundred dollars extra a week now because to go back and forth to work for both parties, you know, the husband and the wife or what have you, it's a big burden on the average family, and we're seeing people pawning their more expensive items. We kind of specialize in larger loans. We do fine jewelry. We do automotive, TVs, fishing boats, large tools, musical instruments.

CHIDEYA: So that is significant amounts. Let me ask you this. On an emotional level, do you ever feel, wow, somebody just came in here with a broken heart and what I'm doing is, you know, it's legal. It may even help them in some ways but it's also - it's also a function of heartbreak. How can you operate?

Mr. AUBREY: To be honest with you, we feel pretty good about what we do because most of our business is loaning, loaning people money. Eighty percent of those people come back, so we know we help 80 percent of those people because they needed a short-term loan for whatever, make a house payment, utility payment, car payment, unexpected emergency. So most of the time - and that's kind of the national average, to be honest with you - most of the time it's to help the local person who needs a short-term loan.

CHIDEYA: Keith, from your perspective, if you were to talk to someone about their options. Let's just do a scenario. There's someone who, for any number of reasons, really is not going to make their mortgage or their rent unless they do something serious, and they have that family's, you know, set of electric guitars, something that, you know, might go well at a pawnshop. What other options would they have, Keith, besides pawning those items, and when would it be a good idea for them to do it versus not doing it?

Mr. REED: Well, I think you've got to start before you get to the point that you've started to pawn your family's items. A lot of times people get desperate, and they start to think of the easy, the quick-fix solution. And this is not to belittle what Tony's doing in his business, but it is to say that if you've not called your mortgage company to see whether or not you can work out a payment plan, to see if there's something that you can do to try to stay in your house, then ultimately, going to the pawnshop and getting a short-term loan to be able to pay back that money that you owe the mortgage company is only going to help you for a short period of time.You're not going to end up out of the situation that you need to be out of.

What you need to do is start to think more long term about what your options are. Now, if you get to the point where you're desperate and you absolutely, positively have to generate some cash, of course one of the things that you want to do is look at maybe at some social services agencies. It's possible for you to get some help with your utility bills. Maybe not, of course, your mortgage but there is help that's out there, to get some help, some other short-term help with other things.

But I think the idea is that you want to try to make some arrangements to keep yourself out of long-term trouble before you have to do - you have to resort to selling the things or borrowing against the things that you have in your household.

CHIDEYA: Tony, do people come in just wanting to sell things? You know, because I certainly, from what I know about pawnshops, think of them as places where you can - you put something up and then you can get it back if you pay off the interest. But do people come in just saying, hey, I just want to sell all this straight out, and it's more of a consignment-shop model?

Mr. AUBREY: Typically, most people do want a loan because they want the option of retrieving their merchandise. However, I would say, we're about 25 percent of the people that come in they do sell because they do get more money, and they just sell it outright because they're taking advantage of the high gold market or what have you. That's been a big influence lately because of the gold prices, so a lot of people had a lot of extra jewelry laying around. So if they dispose of the jewelry and gold being high, it was a significant amount of cash to them. But yes, we do both. We buy and we loan, also.

CHIDEYA: What's the mood that you see - and Keith, I'm going to ask you to wrap this up in a second - but before we let you go, Tony, what's the mood of people who perhaps were hoping for things to turn around? I mean, I have people who I know very dearly in the Detroit area, and it's rough. It's rough to think about, you know, when are jobs coming back? So what's the mood when people walk into your store?

Mr. AUBREY: Well, surprisingly, most of the people they're praying and hoping that things turn around quickly, as all of us do. But you know, people from Detroit, they're kind of - they're spirited very tough and they try to look at the bright side, and hopefully this automotive and generally the economy just turns around sooner than later.

And I've got to say, I'm surprised. I've had some people, you know, that have a serious home issue where they need large amounts of money because of the subprime issue, and you know, they come in and they leave with the money with a smile on their face. It's kind of - it is heart wrenching, and hopefully for everyone it turns around soon.

CHIDEYA: Keith, just to take it home. What should you think of when you're making a decision? You're basically faced with a decision, how do I get money fast? What should be the question in your mind about decisions that you make?

Mr. REED: The question in your mind should be, what are the long-term ramifications going to be? Because there are many options out there for people to get money very quickly. To, you know, run right out, you can do payday loans, you can go to a pawnshop. There's all different short term - kinds of short-term borrowing, but you really need to think what the long-term cost is going to be to you. Whether, if you go to a pawnshop and you turn in that guitar or that wedding ring or the television, are you actually going to be able to get it back? Are you actually going to be able to afford the interest on it? And what will the consequences be if you're not going to be able to go back and get it? Are you really willing to lose that item?

If you go to a payday loan shop and you get a payday loan and you need some money right now, but you're going to end up paying more interest than you can actually afford to pay back - and in many instances that becomes the case - what's going to happen? Are you going to fall into this trap where you're paying back more and more and more debt than you ever would have needed to incur? That's the thing that you need to think before you go out and you look into some of these short-term options that you have to borrow for quick cash.

CHIDEYA: All right. Well, Tony and Keith, thank you.

Mr. AUBREY: Thank you.

Mr. REED: Thanks, have a good one.

CHIDEYA: You too. We've been talking to Tony Aubrey, owner of Motor City Pawn in Detroit, Michigan, and Keith Reed, reporter for the Cincinnati Enquirer. He joined us from member station WVXU in Cincinnati, Ohio.

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