The next time you buy a cellphone, things will probably be very different. And better, for the most part. Cellphone contracts look to be going the way of the flip phone, replaced by what are essentially no-interest phone loans. Here’s why that matters.
Comparison shopping is the consumer’s best tactic, and most big companies’ biggest headache. So for years, consumers have had to contend with complicated phone subsidies, early termination fees, family plans and data overage charges.
Now, half those headaches are on the verge of extinction. When Verizon announced earlier this month that it was doing away with phone subsidies and two-year contracts, it marked the fatal blow to what has been the most confusing part of cellphone shopping. Until now, the best phone deals often required iron-clad two-year contracts with a carrier that came with hefty separation penalties — $350 early termination fees, for example. The business model was confusing: carriers subsidized the price of phones to draw in customers who would pay high monthly bills. It wasn’t all bad — some people got nice new phones on the cheap – but it had the unhealthy market effect of blurring the real price of handsets.
Now, carriers are offering a different set of choices — buy your own phone, finance the phone or lease the phone. The good news is that the price of phones should be clearer — a Galaxy S6 Edge might cost $768 or 24 payments of $32, for example. Even better: This new model should also make consumers take a new look at bring-your-own discount plans offered by off-brands like Total Wireless (operated by TracFone Wireless, though it likely runs on the Verizon network based on its coverage map).
But don’t think you are getting away that easy. While annual contracts are gone, and with them early termination fees, other terms and conditions have taken their place. Many consumers will end up with a new “monthly device payment” instead. Leaving a carrier before two years have passed will be a little less painful, but not painless. Consumers will have to pay off the phone loan somehow, by either paying the remaining balance, or paying part of it and returning the gadget, or both. Thanks to Sprint, there’s an option to “lease” phones, which is a little cheaper, but as you might expect from the name, requires consumers to return the gadget after two years.
And the saddest news of all: the bottom line from the big four carriers is that, no matter how they stack their fees on top of each other, all four end up charging consumers about the same for a newish smartphone with a good-enough data plan. Your individual needs might vary, and you might get a little better family plan here or a little newer phone there, but in the end, the prices are strikingly similar.
A Look at the Big Four Plans
When I priced them this week, here’s what I found. (These calculations exclude activation fees and taxes).
- At Verizon, a Galaxy S6 Edge costs $32 a month for 24 months. Then, 3 GBs of data costs $45 a month. Then, users must pay a $20 monthly accesscharge for each phone. Total cost/month = $97
- At Sprint, that phone costs $30 a month to lease or $33 a month to own for 24 months, plus $60 for “unlimited” monthly data, with strings attached. Total cost/month = $93
- At T-Mobile, the Galaxy costs $32.50 a month for 24 months, plus $60 for 3 GBs.Total cost/month = $92.
- At AT&T Wireless, a Galaxy 6 Edge costs $24 for 30 months – (see how that works there? Cheaper — but not, because of the longer term). Then 2 GBs a month cost $55. Total cost/month = $79, but with longer payment terms.
One very positive thing to note about these changes: All these firms are essentially lending you money for free to finance your new cellphone. Nothing wrong with free financing, as long as you understand the commitment you are making. Paying off a phone loan balance can be a fair way to deal with a cellphone divorce than an arbitrary early termination fee.
What Does it Mean for You?
Here’s how to compare phones: calculate the true two-year cost of your gadget, all add-on fees considered. That means total phone cost plus 24 monthly bills (if that’s your commitment) plus the value of what you’ll have at the end (a working smartphone? A phone you can’t wait to ditch? You’ll have to decide).
If you are the type to want the latest gadget at all times, (there are many of you — Recon Analytics says that 49% of Americans replace their device every year now), this new structure adds more flexibility. For example, Sprint is offering a “new iPhone for life” plan, which lets customers trade up to the newest iPhone once every year if they are on a leasing plan and turn in their old, working iPhone.
The phone loan programs should make Americans more aware of their gadget costs, and the fact that they usually own them after two years. Hopefully, that will make off-brand providers like Straight Talk ($45 a month for 5 GBs) worth a second look. And don’t forget, the traditional carriers all have their own sub-brands that offer cheaper, bring-your-own phone plans.
But note that all these changes come with a very important caveat. Now that cellphone companies are acting like lenders, they will….act like lenders. Many of these deals will only be available to consumers with good or excellent credit (here’s a guide to what’s considered a good credit score). So add “before I shop for a cellphone” to the list of times when it’s important to get a copy of your credit report and credit score. You can get a summary of your credit report for free every month at Credit.com.
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