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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