Never Sign a 2-Year Contract with a Cell Phone Carrier

by Kevin on January 12, 2011

With the Consumer Electronics Show wrapping up last week, and Verizon’s big iPhone announcement yesterday, I thought it would be appropriate to talk about one of the most critical pieces of technology in many people’s lives: the glorious, attention consuming cell phone.

I used to be one of those free/flip phone guys. No texting, no web, nothing. Just calls for me please, and make them short because I don’t have many minutes. A friend convinced me to get the original Blackberry Storm (huge mistake), but I was hooked.

My wife and I joined the rest of you in the 21st century, and now I use my HTC Incredible for GPS, to manage multiple e-mail accounts, to handle my freelancing work, and for checking sports scores while I’m out and about. I’m a full convert to the land of smartphones and Android, and not afraid to admit it.┬áIt’s gotten to the point that I’m pretty pumped up about the upcoming phones this year that will land on Verizon like the HTC Thunderbolt and Motorola Bionic. I’m reading blogs and looking at specs. It’s all very interesting to me.

However, no matter how interested I am in a phone you won’t catch me ever accepting a two year agreement.

Two-Year Cell Phone Agreements Suck

The carriers offer you a better discount on a two-year cell agreement because it is better for them, not you.

Here is a pros and cons list for two-year agreements:

Pros:

  • A better discount on a new phone.

Cons:

  • Early Termination Fee (ETF) is prorated at a smaller rate. A $350 ETF is lowered by $29.16 every month on a 12 month contract. On a 24 month contract it only goes down $14.58 per month. After 12 months on a 24 month contract you would still owe a $175 ETF to get out of your contract.
  • You are locked in for an extra year’s worth of payments for service. If you try to get out after 12 months you still have 50% of the early termination fee to pay to get out.
  • Your cell phone will be worthless at the end of the two-year contract. Not that it won’t work, but it will literally be worth a lot less in terms of value than after 12 months. After 12 months you can still cell your current cell phone for a decent amount and use the money to buy yourself a new cell phone. 24 month old phones are essentially obsolete.
  • Technology moves extremely fast. Phones have completely changed over the last two years. If you’re able to sell your 12 month phone at a good enough price you won’t need to contribute additional funds to buy the newest phone. You’ll have the newer technology every year without having to invest hundreds of dollars every time.
  • Increased odds of malfunction. The longer you own the phone the more likely it is something is going to break. If you’re still on contract you would need to flex your negotiating muscles to get a deal on a new phone, or be stuck paying for a new one at retail prices.

Minimal Cost Difference in One-Year Agreement

Let’s compare cost differences between the discount on a phone for a one-year agreement and the same phone on a two-year agreement.

If you wanted to buy a Droid X on Verizon this is the cost difference:

  • 2-year contract: $199.99
  • 1-year contract: $269.99

That’s $70 more or $5.83 per month on a 12 month contract. That sounds like a lot until you consider that you’ll be able to sell it for more. The Motorola Droid was released on November 6, 2009 and is the closest phone I could find to use as an example. It’s about 14 months old. If you planned it right you would sell your phone every 10 to 12 months (and likely get a higher price). Prices for the Droid range from $130 to $170 on eBay right now. If you sold earlier you could probably bump that up to $150 to $200 at least.

And that’s just one example. The phone you’re targeting may not have as big of a gap between the 1-year and 2-year price.

What do you think? Are two-year contracts that much better than one-year contracts?

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