Looks like two-year phone contracts are going the way of the dinosaurs.
The nation’s largest cellphone provider, Verizon, announced last month that it would eliminate two-year service contracts for its customers— and the up-front phone subsidies that made those contracts attractive. Sprint announced the same week that it would also be phasing out two-year contracts. Instead, customers with these companies can either purchase a phone up-front, pay for the full cost through monthly installments, lease a phone, or bring in their own phone.
The two cellphone companies are the last nationwide providers to jump on the no-contract bandwagon. T-mobile changed the game in 2013 when it began introducing contract-less deals, and soon after AT&T began pushing its own bring-your-own device plan.
Why is this such a big deal?
It changes the way we think about buying cellphones and plans, altogether.
Until this point, when you purchased a cellphone, the company would give you a discounted price in exchange for locking into a year or multi-year contract. While we may have paid $100 or $200 for the latest and greatest smartphone, the actual cost of that phone without a subsidy might have soared to $700 or $800.
In some ways, it was a win-win: You got a cheaper phone, and your provider received guaranteed business for the next several years. But the phone subsidies were expensive for major phone companies, and many consumers were unhappy being shackled to a plan for two years. Hence, the abandonment of long-term contracts.
But is this a good thing? Are you better off freeing yourself from the contract?
To start, you’re no longer tied to a long-term contract, so you are free to shop around for the best offer. Consequently, cellphone companies are more aggressively targeting your business and trying to beat out the competition with better offers.
There’s also a comforting level of transparency without contracts. Consumers used to be ignorant of the true value of their cell phones, given the opaque up-front subsidy. Now, customers know exactly what they are paying for and can accurately compare offers.
Obviously, the worst part about not being on a long-term contract is that you must pay the full cost of your phone. If you want the newest iPhone, that could put a dent in your wallet.
Companies are allowing interested customers to pay for the phone in installments—which saddles you with the carrier until your device is paid off, similar to what would occur under a two-year contract. Furthermore, depending on the carrier and plan, you may no longer receive the same yearly upgrades as before.
While Verizon and T-Mobile no longer promote two-year contracts, AT&T and Sprint still offer the option. However, you will pay more on a two-year contract to offset the cost of an up-front phone subsidy. (The same principle applies for family plans, as well.) For example, Sprint offers a $60 per month individual plan without contract. With a 24-month contract, the same plan is $85 a month.
So what should you do if you’re considering leaving your long-term contract? It mostly comes down to the phone you want, and if you are willing to pay for its unsubsidized cost.
If you aren’t worried about having the newest and fanciest smart phone, a contract-less plan could be a huge money saver. You could either bring in an existing phone (free!) or pay for low monthly installments on a less expensive phone.
However, if you a starving for the latest, most expensive tech, you still might be better off taking the subsidized phone with a long-term contract. But even with a more expensive phone, if you are able to pay it off relatively quickly, you will be left on a plan that has an overall lower cost than if you were on a two-year contract.