The Real Cost of a Two-Year Contract

You have probably walked into an electronic retail store and passed by their display of basic and smartphones for sale.  You have seen the prices on iPhones and Galaxy S3s and probably thought that $200 is not much for a new phone.  You take out your 1 year old phone, view it, turn it around, it feels quite heavy and bulky compared to the iPhone 5, no?  You still have a year left before your contract expires and you tell yourself that once you get your pay tomorrow you will run to the nearest phone store and grab the new iPhone.  After all, it is only $200 right?  Wrong.  The true costs of getting a phone are much more complex than the sale tag next to the phone has you believe.

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Subsidized vs. Unsubsidized

Before we begin, there are a few things everyone must be aware of.  The first is that the three biggest cellphone carriers in the United States, AT&T, Verizon, and Sprint offer their services with a commitment of a two-year contract.  The second is that the big red price tag next to that new phone you wanted is not the actual full price of the phone.  There are actually two prices on a phone, the subsidized price and the unsubsidized price.  For various reasons, (I won’t speculate over them at the moment) cellphone carriers that use contracts sell their handsets/phones with a subsidy attached.  For example, although you pay $200 for a Samsung Galaxy S3, you get that discounted price by agreeing to a service contract of two additional years.  With the example, you are receiving a subsidy from the carrier of about $450 which puts the handset’s full/unsubsidized price at around $650 (supposing that is the correct full price). People can still buy a handset without signing a new two-year contract; however, the handset would be priced at the unsubsidized price.  Be warned though.  If you are planning to buy a new phone for the one you broke last night and you are still within your contract then you will end up paying the unsubsidized price.

Upgrade Fee

All three major carriers in the United States Sprint, AT&T, and Verizon charge an upgrade fee whenever a customer renews a new two-year contract.  The upgrade fee differs between carriers; AT&T charges $36, Verizon charges $30, and Sprint charges $36.  The upgrade fee is usually not collected at the time of the upgrade.  Instead, the upgrade fee shows up either on the first or second billing cycle of your phone bill.

Tax

Depending on where you live, the tax structure will differ and result in a different tax needed to be paid.  Here in Nevada, we have a sales tax that differs between counties.  The sales tax in Nevada is not applied on the subsidized price of the phone; instead, the tax is on the price of the phone without the two-year contract.  Let us take the iPhone 5 for example.  The subsidized price of the phone is $200 whereas the unsubsidized price is around $700.  The sales tax in Reno (around 7.725%) would add up to $50.75.  If you want to find out how much tax you will end up paying, I suggest asking your local phone dealer what the tax rate is for the area and whether the tax is on the unsubsidized or subsidized price.

Phone Accessories

More than likely, the phone you get on your next upgrade is incompatible with the cases/accessories of your old phone (some accessories like Bluetooth headsets and micro USB chargers are universal with other phones).  The most common accessories people end up buying for their phones are a case, a car charger, and headphones.  If you didn’t get the insurance offered on the phone at the time of purchase, you will probably end up buying a case to protect the $600 computer from breaking on the floor.  Based on my experiences as a RadioShack sales associate, 35% of those who buy phones end up buying a case for their phone either at the time of their purchases or within a month at another store.  Depending on where you shop around, a good protective case for your phone will cost you between $35 to $80.  A lot of people end up buying a car charger for their phones because either a) their battery potential has decreased to the point it no longer holds a good enough charge or b) their phone usage far exceeds the normal level of battery consumption that they end up running out of juice too quickly.  You can usually grab either a car or a wall charger for around $20.  Depending on the quality of headphones you desire, the price a pair can range anywhere between $5 to more than $1,500.

Insurance

Maybe you are the type of person that does not want a bulky case on their slim new phone.  If that is the case, you might have decided to get the insurance offered at the sale of the phone.  Different retailers offer different insurances and they all range in benefits as well as price.  Usually, you can get enough protection on your phone to allow it to survive till the end of your two-year contract for about $100 to $150.  Some retailers offer monthly options of their insurance in order to avoid one giant insurance payment up front.

Total it up

Let’s take two different situations in where I get the same phone, the same accessories, and the same insurance, but the only difference is that I get the subsidy on one situation and I don’t on the other.  Let’s say I get the white 16 GB iPhone 5 for AT&T with a nice defender series Otterbox case, some Skullcandy headphones, and the two-year accidental insurance called AppleCare.  With the renewal of my two-year contract and the subsidy, the whole package would cost me $501.15.  Without renewing the contract and the lack of subsidy, the same package would cost me $1,000.15.

Item Subsidized Cost Unsubsidized Cost
iPhone 5 $200 $699
Defender Case $59.99 $59.99
Skullcandy Headphones $39.99 $39.99
AppleCare $99.99 $99.99
7.725% Tax $65.18 $65.18
Upgrade Fee $36 $36
Total $501.15 $1,000.15

Price wise, it would more beneficial for one to sign the two-year contract than to buy the phone outright.  You might prefer not getting stuck in a two-year contract.  If that is the case, you would be stuck with the unsubsidized price.  In the end, the decision is always up to you.  I can only arm you with the information to make an informed decision.  Getting a new phone soon?  If so, let me know what you’ll be getting and how much you’ll end up paying by commenting below.  As always, comments, corrections, or concerns are always welcomed.

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One thought on “The Real Cost of a Two-Year Contract

  1. Pingback: 3 Reasons Why You Should Not Sit on Your Upgrade | The Layman's Guide to Electronics

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