Comparing Pre-paid and Contract Cell Phone Plans

They sound so seductive – a new iPhone 4 for $199, a Droid Incredible for $149, an HTC Evo for $199, and T-Mobile 4G phones for $199, not to mention lots of “free” phones with basic features. Are the really that cheap?
If you said no, you’re right. Let’s take a look at how you get these nice prices.

To get any regular AT T;, Verizon, Sprint, or T-Mobile phone you must agree to a contract, usually for two years. For smartphones (and in some cases less-powerful feature phones) you must also get a data plan for the same term. Built into these plans is money to gradually pay back the carrier for giving you a phone so cheaply (what’s called a subsidy). And those early termination fees you hear about? They exist so the carrier gets its subsidy money back if you cancel your contract early.

Although all the major carriers have no-contract plans, not to mention other, smaller carriers, to get the newest, most powerful smartphones you have to get a plan with a contract. They lessen the up-front cost by having you spend more over the course of the contract.

So is there a cost difference between contract and no-contract smartphones and plans? In most cases you can’t make an apples-to-apple comparison as the phones or networks don’t match. One legitimate example is the BlackBerry Curve 8530, which as of this writing you can get from Sprint as well as their no-contract service Boost Mobile. This is a fair comparison because both services use the same network. The Sprint phone costs $49.99 after the subsidy, while Boost Mobile charges you $199. Sprint phone and data combo plans start at $69.99 (before taxes), but to match Boost Mobile’s $60 unlimited BlackBerry plan (which now get cheaper over time) you have to pay $99.99/month. After one year of a two-year Sprint contract you’ll pay a total of $889.87 with the $69.99 plan or $1,249.87 with the $99.99 plan, but only $859 with the Boost mobile plan. And if you keep the phone longer the Boost deal gets even better.

This is only one example; in most cases there’s no way to tell what the cost difference might be. For most high-end phones you can’t make a comparison since they are only available with the subsidized price and with a contract.

Buying Advice

The point here isn’t to rip on the carriers. I doubt many people would get high-end smartphones without the subsidized price. I have a Sprint plan with 2 smartphones, and I don’t know if I would have taken that plunge without the subsidy.

The point to take away from this is to know what you’re getting into. Phone and data plans add up to lots of money over time, so take some time to decide what you want and what your options are.

Here are a few other suggestions:

1. As long as the data plan is the same between two phones, take the subsidy into account when you’re comparing two phones. A 16GB iPhone 4 ($199 with contract) isn’t really twice as expensive as an 8GB iPhone 3GS ($99 with contract); with the subsidy removed (that you’re paying for during the contract) it’s closer to 25% more ($500 vs. $400, both guesses on my part). So don’t be shy about getting the higher-end model if that’s what you want.

2. The longer you keep a contract phone, the more you pay in “subsidy”. After the contract’s up the plan’s price doesn’t go down, so you’re still paying them for the phone. If you want the maximum value from your contract, upgrade as soon as you’re able to. Be aware that you’ll probably have to extend your existing contract to do this.

3. When considering a no-contract service be sure to consider the network’s coverage area. Some smaller carriers don’t cover the entire nation.

4. No-contract services are typically sold on an individual basis, but carriers have family contract plans that combine two or more lines at a savings. Family plans can even the playing field somewhat if you’re looking for more than one phone.

So that’s the story behind the cheap cell phones. I hope it helps you make an informed decision the next time you go cell phone shopping. Happy hunting!