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?

{ 16 comments… read them below or add one }

Sun January 12, 2011 at 9:35 am

By selling your phone earlier you keep it relevant and possibly get more money for it. You are going to get a new phone every ten months? What for? You have to learn a new phone every ten months? The time you spend learning specs, buying a new phone, and selling your old phone. How much time does that take? How much benefit is there to having the latest phone?

You also need to factor in that pricing on phones keep changing based on the market conditions and desirability of your phone. May e you come out ahead and maybe you don’t. There’s a lot of unknown.

You also have to pay eBay a commission As well as paypal a transaction fee. So you have to knock off 10% to 15% for selling it online.

Between the labor say it cost you ten hours for phone research, buying new phone, selling old phone, and selling fees, you at best break even IMO

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Kevin January 12, 2011 at 9:51 am

Well it depends on your perspective. If you follow technology anyways then you don’t have much additional time in research. Granted if you had no idea what the differences are because you don’t keep up with it, then I can see how that would be a hassle.

Learning a new phone within the same operating system (iPhone to iPhone, Android phone to Android phone) is not much learning at all. The main difference is the hardware and speed of what the device does.

Re: selling the phone online. I’m writing on that on Friday… where and how to sell. Prices do change based on market conditions, but phones generally depreciate at a fairly steady rate.

I think 10 hours of “labor” is an extraordinarily high estimate, but that’s for my situation.

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Sun January 12, 2011 at 12:27 pm

@ Kevin – you make some good points. I will remove the labor portion since you consider that leisure and its something you already do. Are the phone prices including activation and/or sales tax? What will do you after you sell your phone the first year? Is it safe to say you will get another phone with a one year contract?

For illustrative purposes, let’s say you can sell your phone for $150 after the 1-yr contract and $150 again the second year. There’s a 15% fee for selling on eBay/Amazon. Let’s say $150 w/ free shipping will cost you $20.00 after selling fees.

$270.00 cost of phone
- $150.00 sold on eBay or Amazon
- $5.00 your cost to ship product
- $22.50 after eBay or Amazon fee of 15%
—————
$92.50

But you need a phone for the second year.
So, multiply $92.50 by two and your final cost for two years is $185.00

A two-year contract phone, let’s say I can sell for $50.
$200.00 cost of phone
-$50.00 sold on eBay/Amazon
-$5.00 shipping fee
-$7.50 eBay/Amazon fee
—————
$137.50

At the end of the two year, you will have paid $47.50 more to own two phones in a two year period.

Now, granted, I had to make some assumptions here on what price you will pay for the phone on the second year and what it would sell for on the market later on, but you get my point.

Hopefully, you don’t need to buy any new chargers for your home, car, or office. That will run you another $3 ea shipped for each location.

My point in saying all this is… if you want to save money, reduce your expenses by not purchasing as often. Use what you can for as long as you can.

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Kevin January 12, 2011 at 8:47 pm

Good analysis, and on point.

But, again, it depends on what you’re using a phone for. I use my phone for business purposes.

But even if I didn’t… $47.50 over 24 months is… $2/month.

You’re telling me you’re willing to wait an entire year for what amounts to a $2/month difference?

I will gladly, happily, and quickly hand over $50 extra to have 2 of the the latest and greatest cell phones during that time. If you’re at the point where you literally cutting down your budget to nothing and $2 per month over 24 months is going to break you, then don’t do it.

But seriously. $47.50 over 2 years is nothing to me and well worth it to spend on something I’m interested in.

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Jerry Yee November 11, 2012 at 12:48 am

Are there even 1 year contracts anymore? Seems like now we only have month to month or 2 year

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Golfing Girl January 12, 2011 at 8:11 pm

Sorry–I’m a free phone kind of girl. I’ve never paid for a cell phone and never will. I have always had internet access at home and work (when I worked) and have a GPS unit so I don’t have a need for an extravagant plan and phone. But I’m frugal, and simple–sue me, laugh at me, it’s okay. I may not be part of “the 21st century” but I don’t carry the debt of it either. I cannot justify an expensive plan. By the way, you missed one pro: Discount on your monthly plan (as I mentioned in the previous post, Sprint always offers me a 5-10% discount when I renew my contract, and if they forget, I just ask for it.

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Kevin January 12, 2011 at 8:49 pm

No suing or laughing here. If cell phones aren’t your thing then why would spend money on them. If purses/vacations/pedicures/massages/cooking knives/etc. are your thing… then you’re probably willing to spend on them.

Do what works for you!

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Kendra January 31, 2012 at 4:38 pm

If your brain is the size of a peanut, get the verizon wireless 2 year contract smartphone plan that forces you to pay 30$-80$ a month extra for internet. I personally use wifi if I ever need to be connected to the internet, but Verizon is smarter than that, they forcefully charge you for the data plan if you are carrying a wifi capable cellphone even if you don’t want it or even use data plan.

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Victoria February 26, 2012 at 12:59 pm

He’s right. If you don’t want to spend a bunch of money on a phone then just get a simpler phone.

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rj December 14, 2012 at 10:13 am

OR you could buy a wi-fi enabled device on your own and save a ton of money by going month to month without data .
eg:-
1) buy a $650 IwannabePhone and save 24×30 = $720 plus taxes on the data plans, a net savings of about 150-200 depending on taxes over 2 years for the most expensive device on the market .
2.) Better still if you buy a $450 Lumia 920 then u get a better phone with nokia maps/drive (free offline navigation saves about 120 on a dedicated similarly functional dedicated GPS device) so about $ 400- 500 savings.
3.) Go even cheaper with a crapdroid device. ( lets face it all good androids are as expensive as iwannabes)

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Budgeting in the Fun Stuff January 13, 2011 at 12:22 pm

We sign the two year contracts for the ease factor and because we really don’t care about phones, but I totally get your points. Great advice for techies!!!

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Sisan February 22, 2012 at 8:16 am

I just signed a two year contract because I didnt want to pay $100-$400 for a new phone (I bought a $100 phone and will send in for my $50 rebate). if i payed $100 I would still have to pay the monthly fee around $60. Also I have two other people on my plan in which they will only have to pay $15 each (but I will charge them more so we all pay the same around $40 for us each). So why pay $100 to $600 every year for a new phone plus monthly fee and after one year go out and pay another $100 -$600 when I only paid $100 ( $50 rebate) plus monthly fee that you have to pay anyways?

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Victoria February 26, 2012 at 12:56 pm

well, this is because you got a smart phone. smart phones require data packages that can cost a lot of money.

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Jonzee May 10, 2012 at 1:04 pm

I completely understand what the original author is saying, but the choice is really just based your their needs, budget and interest.

the biggest problem with 2 year contracts are that you are stuck for 2 years regardless of what happens. if nothing happens and you have no need/want to get a different phone/service provider, then its all good.

example: I had a phone with sprint, 7-8 months in I started having problems with data/sms/email. it was minor at first but it got worse. I thought it was the phone so I toughed it out till I can upgrade.

I upgraded, signed another 2 year contract and guess what….still have the problems.

so I started calling sprint…which eventually turned into almost weekly visits to the sprint store, after about 6-7 months, I just couldn’t take it anymore and wanted to switch to a different provider altogether. Sprint charged me the early termination fee of 340. I complained and tried to get the early termination fee dropped since the problem was on their end and I had the visits and phone calls to prove it but what did they tell me?

“The 2 year contract does not guarantee quality of service, there isn’t a provider out there that will give you that kind of guarantee”

to me, that is the biggest reason not to sign the contract. it forces you to stay with one provider and put up with whatever problems you have for 2 years….or pay to get out of it. I don’t really understand how that is legal.

but yea, most people don’t care, there people on horrible phones that complain all the time about their phone or service, those are the same people that will continue to get the free or $29 phones cause at the end, it doesn’t matter to them and the 2 yr contract are for those people.

Me on the other hand, Ive usually just bought the phones outright to avoid contracts but when I went to sprint about 3 years ago, I signed a contract and above explains my situation.

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kurt August 16, 2012 at 2:17 pm

holy crap smarrrrrrrrrrrrrt

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dion July 7, 2013 at 12:17 pm

Here’s the thing :
Straight Talk (2 people) – 90.00 month/unlimited talk,text,data
Phone – samsungs3 – 450.00 = 900 + tax

Costco – Verizon (same service)
2 people – (gov employee 15% discount) unlimited talk,text, data, 4gb
monthiy & all junk fee’s – 135.000 month
Phone samsungs3 – 29.99 = 60.00 + tax (free activation)

overall 2 yrs = Costco’s approx. cost 300 more & your locked for two years. Its all up to the individual. No contracts are the best, but if you shop around and don’t mind 2 yr contract, you can find some decent deals

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