Updated on 09.30.15

Why a Leased Smartphone Is a Dumbphone

Ilona Abramova

You'll spend more and get less by financing your iPhone through a carrier's monthly payment plan.

holding an iphone 6

Don’t be hypnotized by the hype: Leasing your smartphone is a dumb move. You can save more than a thousand dollars over two years by purchasing a phone outright and using a cheap month-to-month plan. Photo: Eduardo Woo

If you find yourself itching to have the latest gadget, take comfort knowing you’re not alone. Roughly half of Americans cut back on other expenses just to be able to afford new technology, according to CNBC’s All-America Economy Survey.

So when big-name carriers like Verizon and AT&T started ditching two-year contracts and instead offering payment plans that allow people to lease expensive handsets like iPhones, many Americans took the bait — nearly 25% of all new smartphones were paid for with financing plans from July 2013 to March 2014.

But are these payment plans really the smartest way to pay for your smartphone? Let’s do the math.

The Two-Year Contract

The two-year contract has been the most popular — and in many cases, the only — option for the past decade. Opting for a long-term plan with a big-name carrier usually means paying about $199 upfront for the subsidized price of a $600-$700 smartphone, along with an activation fee that typically runs $35-$40.

On top of that, you’re paying about $40-$50 a month for the data, talk, and text plan (give or take, depending on your usage) and a $40 monthly access charge for the handset. Over the course of the two-year period, you’re looking at $2,276, not including fees and taxes.

Plus, when your two-year contract is up, your monthly bill doesn’t automatically decrease even though you’ve essentially paid back the full retail price of your phone (those subsidies are built into your monthly rate and recouped over two years). Rather, you’re eligible for an upgrade that allows you to receive a new device (for another $199) along with another hefty two-year contract.

Should you choose to switch carriers or leave your contract before your two years is up, you’re also looking at a steep early termination fee of up to $350.

The only real advantage to staying on a contract is that after two years, you own the phone and can choose to make some money reselling it or to keep using the phone and negotiate a discounted monthly rate (which we’ll discuss in a bit).

The Payment Plan

Verizon recently announced that they are eliminating long-term contracts, joining other carriers in offering new customers a monthly installment plan instead.

Their ‘Edge’ plan works like this: Customers pay $0 down and then spread out the retail price of their smartphone into monthly payments (18, 24, or 30 months). This charge is on top of the price for the line and the cost of the plan, which is divided into five tiers based on data usage:

  • Small: $30/month for 1GB
  • Medium: $45/month for 3GB
  • Large: $60/month for 6GB
  • X-Large: $80/month for 12GB
  • XX-Large: $100/month for 18GB of shareable data

Let’s say you wanted an iPhone 6. The retail cost of the phone is $750. Broken down into 24 monthly payments, that’s roughly $31/month. Each line costs $20/month, which includes unlimited texting and talking — notably lower than the $40 charge in the previous two-year contract model. Now, if you select the Medium data plan from Verizon, you’re looking at a total of $96 a month (plus fees and taxes).

Over the course of two years, that brings you to $2,304 — about $30 more than if you were on a contract. The real kicker with this plan, however, is that the program allows you to trade in your phone early for a new one without putting down another $199 upfront for the device.

With AT&T’s Next plan, for example, you can trade in your phone and upgrade to a newer model after you’ve made a minimum amount of installment payments, depending on the length of your payment plan. By taking advantage of the upgrade, you’re resetting the amount you’ve paid off to zero (much like leasing a car) and have essentially entered a new two-year commitment without the ability to resell your original device.

Monthly installment plans are the Trojan horse of cellular service — they market themselves as a cheaper no-strings-attached option, but the only way to get out of it is to purchase the full retail value of your phone.

If you’re already on one of these plans, the smartest course of action to take would be to pay off your phone under the original payment terms, or buy it out early, and resell it — resist the urge to upgrade by trading your phone in.

Month-to-Month

Unlike the two-year contract or the monthly installment plan, the month-to-month approach truly is commitment-free. You can still enjoy the unlimited talk and text offered by big-name carriers as well as a data package that fits your needs, and you can switch carriers if you relocate to an area where one is more predominant, or just because you’re tired of AT&T’s customer service (or lack thereof).

One way to take advantage of this plan is to hold onto your smartphone after your two-year contract is up and speak to a representative about switching over to a monthly plan, saving yourself about $15-$25 a month (since you’ve paid the entire subsidy back over the course of your two-year contract). Note: This discount does not take effect automatically — you have to speak to someone about making the switch and getting the monthly discount.

The other way to reap the benefit of paying monthly is to buy an unlocked phone outright and opt for an alternative cellular plan like Cricket or Ting. If you can handle paying the initial $750 to buy the phone (or find a lightly used version online for less), this option can save you more than a thousand dollars over the course of two years, even after the cost of the phone.

Pay-As-You-Go

The above options assume you use the same amount of talk, text, and data every month. However, if you’re meticulous about finding free Wi-Fi and monitoring your usage, a pay-as-you-go plan may be your smartest option.

T-Mobile’s Prepaid plan, for instance, gives you 30 minutes of talk and 30 text messages for just $3 a month, with the option to supplement as well as purchase daily data passes. As with the month-to-month option, you must purchase or provide your own unlocked device.

The Bottom Line

It’s easy to get swept up in the tech-craze — but keep in mind that constantly purchasing the latest and greatest device comes at a hefty price. Not only are smartphones reaching their peak, there will always be a new update that’s marginally better, leaving you feeling like you missed out if you don’t have it.

Changing your perspective and making smart choices when it comes to selecting your carrier, determining your monthly plan, and deciding how long to stick with your old phone can save you over a thousand dollars over the course of a typical two-year contract. Don’t fall for that trap — outsmart the smartphone industry.

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