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Cell Phone Contracts and Critical Thinking

Admittedly, this post is out of our typical genre, but it’s something that bugs me and is way too long for a Facebook rant, so I decided this was the best medium to voice my opinion. 

While browsing the Internet today, I came across a T-Mobile ad, promoting zero money down on a new iPhone 5. What a great deal right? Well then the small print shows up. Customer will pay $27 a month for 24 months, which continue even if the customer cancels service with T-Mobile. So how much does $27 a month for 24 months become?

$648! (Although, this is $1 cheaper than buying it off Apple’s website.)

This comes in comparison to the $200 price you’d pay if you locked yourself into a two-year contract with your preferred cell phone provider, which comes with the obvious early-termination clause. These clauses seem to be the root of these no-contract phone plans. People don’t like being locked in. But looking at it from a financial perspective, the answer is obvious, which we can show through two situations.

Situation A:

You buy the new phone from T-Mobile and pay the $27 a month for two years. Even with the argument of the time impact on the value of money, you’re still looking at spending $620 present-day dollars. However, you’ve got a new iPhone that you use for any provider that supports the same structure as T-Mobile.

Situation B: 

You buy a new phone from any of the other Big Four (AT&T, Sprint & Verizon) for $200. Even if each of them requires a $35 activation fee, you’re looking at $235 before you start service. The very next day, you cancel your service, and receive a bill for your $4 in fee from one day of use, plus the early termination fee that ranges from $325 (AT&T) to $350 (Verizon& Sprint) (Interestingly enough, T-Mobile has the lowest cancellation fee at just $200, regardless of device). So to get to the same outcome as Situation A, you’ve reached a grand total of either $565 or $589, still saving up to $55 present-day dollars.

*If you want to make the argument that you would have to pay for one month worth of service in Situation B, that’s fine, but we’d also add that into value received. To compare that to Situation A plus one month of service, you still come out ahead.

Moral of the story: Don’t let these no-contract plans fool you. Wireless companies wouldn’t be offering them if they didn’t have something to gain. Each situation is different, but make sure and do the math before you decide one way or another. If you can’t do the math, make sure you get a phone with a damn good calculator and preferably a common sense app.

 

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