Why paying $720 for a phone can be a better deal than a 2-year contract

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Faced with paying $230 instead of $720 for the same smartphone, or $0 instead of $450, there’s a natural inclination to pick the lower price.

But there are strong practical, as well as philosophical, reasons to pay the higher upfront price rather than locking into a two-year contract to get the lower price.

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The contract price has sometimes been called a subsidized price. But there isn’t actually a subsidy; it’s more like a loan. The contract price for a phone is lower because you pay for the rest of the cost over the course of the two-year contract.

Here are some reasons to pay more at first and not sign a contract.

You don’t know what the future holds. A two-year commitment is a long time for a phone. Maybe you’ll need to move elsewhere in Canada where a different carrier has better signals. Or to another country. Maybe a must-have technology will come along. You’ll be stuck with the two-year contract. Or at least, you’ll be stuck with the need to pay a penalty to get out of that contract.

Buying a smartphone outright means you can get one that is unlocked — one that is not locked to one company. With an unlocked phone, you can change service plans or change companies if your needs change. When you travel, you will have the option of buying a short-term, pay-as-you-go service from a local provider in, say, England or the United States. You’ll be able to use the local network without paying hefty roaming fees, and likely get better signals too by switching to the local network by swapping out your SIM card. Hedging: I’m told that foreigners have trouble buying cellphone service in some countries.

[In a recent policy change, Canada's major carriers will, with conditions, unlock a contract phone for a fee of between $35 and $50. You usually have to wait at least 90 days after signing a contract before the carrier will unlock.] 

With an non-contract smartphone, you are also free to select lower-priced plans. If you sign a contract, some plans will be off limits because they do not include the cost of the phone. Most two-year contracts for recent-era smartphones cost at least $45 a month and $70-plus for a current model. A $35 plan that is perfect for your needs will be off limits.
 
Another factor to consider: Many carriers offer at least a 10 per cent discount on the price of a monthly plan if you provide your own smartphone. Plus, if you don’t need service for a month because you are going on a cut-off-from-the-world retreat, you can stop paying altogether.

Here’s some math. You pay $230 for a $720 smartphone. You still owe $490. To get the phone for $230, you agree to a two-year contract. That contract requires you to sign up for a plan that costs at least $75 a month; over two years, that’s $1,800. If you have your own phone, you can get the same features, with 10 per cent discount included, for $45 a month or $1,080 for two years. That’s a difference of $30 a month; 24 months x $30 = $720.

Total two-year cost if you bought the phone outright: $1,800; it’s $2,030 if you signed a contract. [For the phone you own, $720 for the phone plus $1,080 for service plan, a total of $1,800. For the phone on contract, $230 initially for the phone plus $1,800 for service plan, a total of $2,030.]

Someone who pays full price for a phone saves $230, and also has the benefits of owning the device.

There are occasions when the math can work in favour of a contract; those deals involve lower-cost, older-model smartphones. But you are still stuck with a locked device. An example: you get a $450 phone for $0 on a two-year contract; you must agree to a plan that costs at least $45 a month, for a total contract cost of $1,080.

To see a financial benefit if you go the no-contract route with a lower-cost phone, you have to have a plan that costs around $30 a month or less, before the 10 per cent bring-your-own-phone discount. For some people — likely people who are happy with smartphones that came out two years ago — that kind of a plan might be enough, especially if it is paired with Shaw’s increasingly widespread network of Wi-Fi hotspots. That Wi-Fi access comes bundled at no extra charge for Shaw’s Internet customers.

But, you say, $720 is an awful lot of money to pay in one go. You can deal with that by saving up, putting aside money each month. If $720 is too onerous, maybe you can’t afford it and should look at something cheaper, like a two-year-old $450 model. Or wait until you have more money. That would be my mother’s stance.

Update, Feb. 7, 2015: For a sense of non-contract prices for a variety of unlocked smartphones, here's a comparison chart from Apple Canada's online store.

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In search of a truly portable cellphone
Jody Paterson writes about her hunt for a cellphone that will work anywhere in the world. Without having to sign a multi-year contract, of course. She bought a refurbished, unlocked unit for $119, and is on a month-to-month service. 

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My previous posts are here.

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