How Contracts Work (and Why They Aren’t So Bad)

Ok, so we are all scared of the word contract. We picture a little devil (complete with horns and a pointy tail) waving a fancy scroll in one hand and a pen in the other telling us calmly to “just sign on the dotted line”. Even if you are one of the people that don’t picture this (it’s got to be like 1 % of the population that doesn’t picture this, right?), there is no doubt that we all have this inherent fear of contracts. We become immediately defensive and shy away the minute we hear the word. This is most obvious in any MetroPCS, Boost Mobile, or any other prepaid wireless service commercial. They use phrases like, “Don’t be trapped in a contract”, “Life without contracts”, and they even call the other phone companies that have contracts words like “evil” and “dishonest”.

So how do contracts ACTUALLY work, why do we have them and are they really evil 0r a blessing?

Well, contracts are the prime way most US carriers cell phones and it is the way most of us are used to buying phones. This is a good and a bad thing.
Normally throughout the world, you can buy a phone without a contract and then choose whatever carrier you want to use with that phone (most carriers and phones are GSM so they are pretty much all compatible with each other, unlike here in the States).

Now, we don’t realize it here because we are so used to buying phones with contracts, but a phone with up to date features can cost anywhere from $300 to $700 (and sometimes more).  That may sound like a lot and you may wonder why here in the States we never pay more than $400 for a top of the line phone and most are much less. Well this is because of contracts of course. Phones here in the States WITHOUT a contract cost about the same as the phones over in Europe WITHOUT a contract (a little less expensive usually but I’ll explain why later). Its the contract that we are so much against that gets the price down.

And if you think about it, that is what a device like these “phones” now a day should cost. Break down the features, an MP3 player could run you $100, a digital camera another $150, a PDA $75,  GPS device $150, and so on.

Say you want a phone that costs $500 (without a contract). You goto a carrier here in the States and you sign a 2 year contract to get the phone for $300 (they don’t usually even talk about the No Contract price so you probably don’t even realize that the contract got you up to $200 off on the phone). So because you signed a contract, the phone company knows you will be paying them on a monthly basis (which they will gain a percentage of profit on) and therefore they are willing to sell you the $500 phone for UNDER THEIR COST in exchange for the contract you are signing (they’ll make that money back from the monthly bill over time).
This is why most carrier’s have a cancellation fee associated with their contract. If you cancel before the time period the company has lost money on the phone and needs to get that back to break even (lost of arguments on how many months it actually takes a company to make back their loss on the phone, and that is why most companies have implemented a cut in their cancellation fee for every month you have completed in your contract, but we’ll talk about that some other time).
You’ll also notice that your cancellation fee is close to $200…  notice how they give you $200 off on your phone, and then the cancellation fee is that same amount, not a coincidence.

Also a lot of the companies are introducing No Contract plans now. They are the same as normal plans, but there is no contract and therefore you have to pay full price for the phone (the normal price a phone costs). Verizon and TMobile both have these I know for sure and I’d assume Sprint and AT&T will follow suit shortly. So you now have the choice to get a contract or not when you get a phone.

You SHOULD get the contract if you can though (yes I said it) unless you can’t for credit reasons, and I’ll explain why.

We’ll use the HTC Touch Pro2 from T-Mobile for this example. If you buy the Touch Pro2 without a contract, it would cost you $549.99 (as of today’s date), but if you bought it with a contract it would be $349.99. Now EVEN IF YOU CANCELLED THE CONTRACT THE NEXT DAY AFTER BUYING IT, you would pay a $200 cancellation fee and end up having paid… dun dun dun… $549.99 just as if you bought it without. So why buy without a contract if you can get the contract and save the money up front, and what if you complete the contract, then you saved that $200!

This is not to say that phones should be locked to a carrier, but that is a whole different discussion for another day…

So seeing contracts in a new way or what?

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  • http://www.pcworld.com/article/170624/10_things_we_hate_about_wireless_carriers.html steven

    True but consider how much we pay for everything else. Damn those smart Dutch people.

  • http://www.pcworld.com/article/170624/10_things_we_hate_about_wireless_carriers.html steven
  • Y314K

    Good post UL… Good link Steven… Seems we are paying more for less every step of the way… We might have to start a grassroots effort to change this… Both financially & politically…

    Now, the main thing I still fail to understand is this(I hope some one can go into dept on this)…

    Why would a phone(example: HTC Hero-EU) could be bought in Europe for FREE under a 2 year contract at most carriers with a cheaper plan. And the US Sprint HTC Hero which by now is old tech. being over 4 months since release by the time it come out here $180 with a 2 year more expensive plan. The only reason I can think about is cause they can get away with it…

    I’ve heard the explanations that contracts in Europe are iron clad. But what is stopping the carriers here from making a 2 year contract sliding scale cancellation for $180 & a fully binding FREE Sprint HTC Hero contract where the customer has the choice. Specially with all the mandates they put into contracts regarding minutes & data plans… Seems for the US carriers we are just money pinatas or cash cows.. Muuuuu,,, Muuuuu… Muuuuu….

    We need someone to take a look beneath the surface as to why the smaller markets in Europe can easily give away top the line phones as soon as they are release… And we in the US are stuck still paying $130 under contract for a great but now ancient HTC G1…

    That just plainly sucks…

  • nilmunny

    I was just thinking that myself…

    I just picked up an HTC Hero for free on a 2 year contract paying about £32.50 a month.

    With that i get 600 free minutes, unlimited data usage and umlimited texts.

    It almost sounds like you guys have it pretty rough in the states.

    Also what do you mean our contracts our iron clad?? When i sign up to a two year contract i expect to be under that egreement for 2 years?? What else would you expect?

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  • Y314K

    Finally got around to typing this thru…

    I’ve read both posts about contracts & Upgrading phones multiple times a year… Need your help figuring out which will be the best option for me:

    Right now I am with ATT out of contract with some ancient Cingular phones(2 lines)… Would prefer to move over to TMobile since ATT’s signal disappears once I go into elevators & in other buildings where I work… Sucks walking around. TMobile doesn’t seem to have that problem where I work & is as good as any of the other three networks all over town.

    Been waiting for the right Android phone to resub with a 3 line setup. 2 lines with Android smartphones with unlimited data but no texting since that can be done thru google voice or other data prog options + 1 dumbphone needing only minutes… We actually don’t use that many minutes… We have over 1K rollover minutes with ATT as is on a 450 min plan… So been playing with BillShrink to find out what would be best… Specially with TMobiles new Even More Plus plans…

    Although I am still waiting for a phone that will make me sign up with either ATT or TMobile(Sprint & Verizon are out due to price for a 3 line plan) I am trying to figure out which will be best…

    The breakdown I get from BillShrink is:

    ATT(2 year contract + $200 x 2 for 2 Android phones):

    (Has rollover which means one can compile left over minutes thru out the contract)

    $60 – 2 Lines (550 Mins)
    $30 – Unlimited Family Data
    $30 – Unlimited Family Data
    $10 – 3rd line

    $130 a month – 15% discount (not sure if on the full amount or if only on data)

    TMobile Even More (2 year contract + $200 x 2 for 2 Android phones):

    (TMobile just added a partial upgrade program that would let one upgrade phones after 12 months – so once a year)

    $60 – 2 Lines (750 Mins)
    $30 – Unlimited Family Data
    $30 – Unlimited Family Data
    $10 – 3rd line

    $130 a month – 15% discount (not sure if on the full amount or if only on data)

    TMobile Even More Plus (No contract + $570 x 2 for 2 Nexus One or other Android phones @ full price):

    $50 – 2 Lines (750 Mins)
    $25 – Unlimited Family Data
    $25 – Unlimited Family Data
    $05 – 3rd line

    $105 a month – 15% discount (On data only)

    So both ATT & Tmobile are price the same… One has rollover and one has 12 months partial upgrade available.. And there is the cheaper plan but more costly phone Plus plan… What do you think… Which plan would you recommend…

    Right now I am not sure if ATT will have an Android phone I would really want(Maybe the Dell Mini 5)… And I am not sure if TMobile will have the same… The TMobile contract offering are old… Right now all they got is the MyTouch 3G 3.5 jack which is old… Maybe getting two HD2’s and selling them to get 2 Nexus One’s might work or dual booting Android on to the HD2. Will have to see what shows up at WMC this week… Nothing worthy so far… Other then the Super AMoled screens…

    Getting two Nexus One right now would mean $570 with tax x 2 = $ 1,140 for a pair of phones that are still somewhat buggy… It’s been over a month but no price drop on it yet… Plus now that I’ve seen the Super Amoled vs regular Amoled I might want to wait for a HTC Super Amoled phone…

    There is one possible extra option… Read that with some old phones one can sign up for cheaper unlimited web although some ports or options might be restricted…

    TMobile Even More Plus (No contract + $570 x 2 for 2 Nexus One or other Android phones @ full price):

    $50 – 2 Lines (750 Mins)
    $10 – Plus Unlimited Web
    $10 – Plus Unlimited Web
    $05 – 3rd line

    $75 a month – 15% discount (On data only)

    I’ve only read about this in a few posts.. Not sure if it’s still viable.. But would make buying an expensive phone much easier…

    Any thoughts would be appreciated… If you prefer to email me a response… Just send it to the Mail required when leaving a Reply… Thanks…

    • http://www.theunlockr.com TheUnlockr

      Y314K,

      To answer your phone dilemma, it seems that contract plans (according to BillShrink) would cost you the same price per month but less minutes for AT&T. Rollover is a joke. If you have rollover minutes saved up, it means you are not using them obviously. And you pay an average of $20 more per month (for the same amount of minutes) to have rollover. It would make more sense to pay the $20 more to get a ton more minutes to begin with instead of having less minutes and “rollover”, ya know? Not too mention, you can always call T-Mobile to get the your minutes changed before the months end if you are about to go over (so long as you have not gone over yet) until you get to a set amount of minutes that work for you. But just my opinion on that.
      Another thing, you already said that T-Mobile has better service where you are, so that’s a plus for that as well.
      The thing that would make me decide in your situation would be the phone you want; does it have 1700mhz or 1900mhz for 3G. If the phone you really want has 1700mhz, then goto T-Mobile. If it has 1900mhz, goto AT&T.

      The real question is how long are you willing to wait for a phone? Just remember that regardless of what phone you get, a new, better one will come out the next day lol One good thing to do is to buy phone’s out of contract and then sell them when your done with them so you can get a new one (read my How To Fuel Your Phone Addiction post: http://theunlockr.com/2009/10/31/how-to-fuel-your-phone-addiction-without-breaking-the-bank/ lol)

  • Y314K
  • Ally1234ally

    All of your articles are very informative, but i can walk into Best BuyToday and purchase a brand new desktop computer with dual, tri, or quad processor with good video car, dvd rom, monitor, printer etc for less than 700 dollars or less. So charging 700 dollars for a phone is a scam. A phone device that weighs about 2 lbs,with whatever technology should not cost the prices that phone companies are charging their customers. I laugh everytime i go to the differnet carrier web sites and look at the prices of the phones. I have had this discussion many times with Verizon carrier support technicians and they just laugh along with me when i bring this subject to the fore front in our conversation.

    • Hgill929

      I think the reason the phone cost almost as much as a laptop is beacuse you get almost all the capabilities, but in such a smaller device.
      The smaller the processors become, the more they cost.

  • fonefreek

    I understand what you said about contracts vs. no contract (prepaid), but in your comparison, its worth noting that while you do pay full price for the phone, you can usually save quite a bit of money every month on your phone bill going with prepaid vs. the contract. Of course, thats given you stay with the service for a while.

    • http://www.facebook.com/profile.php?id=539144371 Anonymous

      Yeah, that’s a pretty big piece of information the author neglected to include. So big that it makes the article worthless in terms of actually looking at the pros and cons of contracts. The fact that you pay less month to month isn’t even mentioned. Stupid.

  • http://www.facebook.com/profile.php?id=539144371 Anonymous

    I pay $60/month with a prepay service called Simple Mobile for the same service someone with T-Mobile pays $85/month.  Over the course of the two year T-Mobile contract that is a $600 difference. 

    Prepay wins. This article reads as if it were written by someone ignorant of how the system works or someone that works for AT&T/Verizon/T-Mobile/Sprint.

  • Benjamindavidvine

    I’m from England…I pay £36 a month for 600mins unlimited texts (fair usage usually 3000) 500mb of 3g data also 2GB of btopenzone wifi hot spots allowance and have just got the Samsung galaxy s ii for free….is this good compared to what the deals are like over in the states?

    • Sdf

      its better than in the us