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The pros and cons of lay-by

Lay-by can be a cheap and convenient way to manage your buying budget, but you should be aware of the pitfalls.

woman looks at price tag on shirt
Last updated: 21 May 2021

Do you remember when your parents bought dinnerware or a new couch on lay-by? 

These days a shopper looking for a payment plan is probably much more likely to use a buy now, pay later service such as Afterpay or Zip, but lay-by is still available as an option to shoppers who aren't paying for their goods upfront. 

Buy now, pay later comes with many traps and we believe people should steer clear, but a lay-by's fine print can also sometimes include tricky conditions such as expensive cancellation fees.

What is lay-by?

Lay-by is a purchasing option offered by some retailers where you can pay a deposit on an item, and then pay the full price off over an agreed timeframe. Payments are usually required at set intervals. The store holds the goods until you've fully paid for the item, which is when you can take it home.

Lay-by is still offered by large department stores such as Myer, David Jones, Target, Big W and Kmart, and you may find it available at some smaller retailers. Items are usually held for eight to 10 weeks, although it can be longer for special programs, such as Big W's 'In store Lay-by for Christmas' offer which has a 24-week term. 

But beware – if you change your mind and cancel your lay-by or don't pay it off in the agreed time you may be hit by a cancellation fee of up to 20% of the purchase price.

Pros of lay-by

Budgeting tool

Lay-by can be a good way to budget, especially if there are low set-up fees and you're making a large purchase. 

Good for Christmas shopping

You can distribute the cost over a longer period, select your presents before popular gifts are snapped up, and avoid the last-minute crowds.

Less risky

Cheaper and safer than buy now, pay later and interest-free offers as there's no potential to be charged interest, and you can easily cancel your order (because you haven't taken ownership of the goods), although you'll likely lose the service fee and can be charged a cancellation fee.

Cons of lay-by

Service fees

You'll be charged $3 to $12 by the large department stores for each lay-by you take out. 

Cancellation charges

You may be charged a fee if you cancel the lay-by because you no longer want the product, or if the retailer cancels the lay-by, due to non-payment for example. 

K-Mart and Big W charge $11 and $12 respectively if the store cancels the lay-by due to non-payment, whereas David Jones charges 20% of the lay-by value whether you choose to cancel or the store cancels the lay-by due to non-payment.

According to the ACCC, a cancellation fee must be no more than the "reasonable cost" relating to the lay-by agreement (such as storage and administrative costs). A 20% cancellation fee may not constitute "reasonable cost" in some cases. For example, if you cancel the lay-by of a winter coat in August the retailer would have to discount the item in order to put it back out for sale, but if the item on lay-by isn't seasonal, is reasonably small and readily available, the store's reasonable cost may not be very high, so it may be worth asking for a reduced fee.

Lay-by is always at the original price

The cost of your lay-by won't change once you've begun the contract, even if that product goes on sale during your lay-by term. If a store goes into receivership before you've finalised the lay-by, you may become an unsecured creditor, making you last in line to get your money back.

Lay-by vs BNPL and interest-free

As with a BNPL or interest-free purchase, lay-by payments can be spread over several weeks or even months. But unlike BNPL and interest-free deals, you can only take the product home once it's been paid off. 

On the upside, lay-by fees are much lower and easier to understand than those for interest-free and BNPL, and you'll never be charged interest. 

We found no mention of payable late fees in the lay-by T&Cs we viewed from the big retailers, but make sure you read any lay-by terms carefully yourself as they may cancel the order if payments aren't made, and refund you the money paid (less a cancellation fee and possibly the service fee). On the other hand, BNPL services can apply late fees to missed payments, and fees to accounts that have money owing at the end of the month, which can quickly add up. 

Lay-by could become expensive if you change your mind or can't keep up the payments

Lay-by could become expensive if you change your mind or can't keep up the payments, as you'll likely lose the service fee and may be charged a cancellation fee.  However, if you just need a longer period to pay it off, ask the retailer as they'll often allow you to vary the payment terms.

Unlike BNPL and interest-free offers, lay-by is not a credit product and has no bearing on your credit rating. 

If you can't pay for a product upfront, lay-by is usually a better option than BNPL and interest-free deals.

Your rights with lay-by

A purchase qualifies as a lay-by when two or more payments are made, including the deposit, and you don't receive the goods until they're paid off. 

Terms and conditions

The shop must give you a lay-by agreement setting out terms and conditions. 

Cancellation by the customer

If you cancel the lay-by, the trader can charge you a termination fee, but it can't be higher than the shop's reasonable costs. So just what is unreasonable? 

One consumer complained to NSW Fair Trading of being hit with a $1380 cancellation charge – the 20% deposit for a $6900 ring with no customisation work done on the ring. After NSW Fair Trading intervened, the jeweller relented and gave a full refund.

Cancellation by the retailer

A store can't terminate a lay-by agreement unless you breach it – by missing a payment, for example – or they lose the goods through circumstances out of their control, such as a fire. 

Queensland Fair Trading reports an incident regarding a lay-by for a $400 stereo. Once it was paid off the consumer went to the store but was told the stereo had been lost. Instead, he was offered a different stereo with fewer features. The store had the originally ordered stereo on the shelf but said it would now cost $500 and could not be discounted. This store was acting illegally and the consumer was entitled to the stereo for $400.

Visit the ACCC website for more on your rights when it comes to lay-by agreements.