Handset Financing - Don't Do It!

All major carriers now have handset financing offers.  So what does it mean?  You go into a wireless provider's store and see that shiny new iPhone or Samsung Galaxy for $500+ and don't have enough money (or are unwilling) to pay for it right now.  You could get that same phone for $200 if you sign a contract with a postpaid carrier, however, you either don't pass the postpaid credit check criteria, your carrier no longer offers subsidies, or you're one of the smart ones who realizes that the postpaid plan costs you a lot more per month, and over time the prepaid plan is a much better deal!

So the prepaid carrier gives you an option to put a minimal amount down today (ex. $100), and to essentially finance the rest over time (ex. 9-12 months).  You may even have an option to avoid interest charges if you pay it off within 90 days, though there will still be fees assessed.  This is the latest financing program that the prepaid industry popularized since its initial trial launches in late 2012.


Why Do Carriers Like Handset Financing?

• Programs like these enable carriers to get customers on board immediately.  Any hesitation on the part of the customer usually results in them leaving the store and open to competitor offers (i.e. customers leave and never come back!).

• The operations and risk of financing are born by third party companies who are actually underwriting the loan (ex. Progressive Finance, BillFloat, etc.), so carriers get their money upfront with very little risk.

• Even though you're not in a contract with the wireless carrier, paying for an expensive phone (even if you're financing it) typically results in you staying with them longer.  So they'd rather have you finance a more expensive phone, than have you pay in full for a less expensive phone.  Research clearly shows that the more you spend on a phone, the longer you stay, with iPhone customers historically being even more loyal than other smartphone customers.

Why Do Customers Like It?

• You get to walk out of the store with a fancy new phone when you don't have the money available.  (Now that's stating the obvious!)

• You'll typically get a much better interest rate than you would charging it to a credit card.

Things Customers Should Consider

• Do you really want to pay fees and/or interest just to buy a smartphone that will be obsolete long before you finish paying it off?

• These financing offers usually also allow you to include accessories at the time of your phone purchase.  How much do you really want to pay for a case or headset after interest is calculated?

• Even though they don't do a credit check to qualify you, knowing your name, address, and date of birth, they can hit your credit score (either positively if you pay as agreed to, or negatively if you don't honor your financing contract).  Even one delinquent payment of $50 can crash your credit score such that when you go to finance a car or a home, you'll end up paying many many thousands of dollars more over the life of the loan.

Why Do I Feel Handset Financing Is Evil?

• It preys on us consumers who lack the patience to save up our money to buy what we want.  We want it now!  This type of attitude (dare I say financially irresponsible attitude?) is largely what contributed to the financial meltdown in 2007, whereby people were buying homes with interest only loans, and minimal or no money down on  homes they couldn't afford.  Phone financing is the same spirit on a smaller scale.  While it won't create a national financial crisis, it's encouraging negative financial habits.

• If you can afford to pay off the loan in 90 days to 9-12 months (including fees and interest), why can't you wait 6-12 months and save up the necessary money?

• A lot of these high end smartphones that are being financed aren't really worth that much.  For example, you can get a $200-$300 Android phone that will perform just as well, if not better than the latest $500-$600 iPhone.

• You may damage or break your phone before it's paid off.  Now you've gotta go buy a new phone while you're still paying off the one you dropped, lost, or drowned in the toilet.

• These handset financing programs are not always fully integrated with the carriers, meaning that you may have to deal with paying a separate bill with the lender while you pay your regular phone bill to your wireless provider.  That's an extra hassle that you'll need to deal with, and demonstrates the lack of investment carriers have in you as a customer.  In other words, they want you using their phones, and don't care what your financial situation is that gets you there.

More Food For Thought
One of the elements of prepaid wireless that we all like is avoiding the need to sign a contract. However, once you opt into one of these financing deals, you're ultimately tying yourself into a contract!  Given that currently in most cases you're signing a contract with the financing company (not the prepaid wireless carrier), while you can change wireless carriers, you're still locked into a financial obligation.

You may be able to use the phone you financed with another prepaid provider that supports Bring Your Own Smartphone, which would be ideal.  If not, you'll need to purchase another phone while you're still paying off an old debt.  This would feel similar to selling a car for less than you owe, buying a new car, and still making payments on a car you no longer have.

I'm sure you can tell that I don't like the spirit of handset financing. It's a ploy to get more activations (Gross Adds) from prospective customers that can't afford to purchase their phones.


Conclusion
Overall, I feel that phone financing enters into the realm of pathetic.  Pathetic that carriers are trying to lure customers into buying something they can't afford, and pathetic for people who don't have the diligence to save up and buy the phone they want when they have the cash to pay for it.  Maybe this sounds way to harsh and judgmental; I suppose it is.

In addition, the price of smartphones (and all technology for that matter) continues to decrease month after month, so you'll be financing a phone when a few months later you could buy a smartphone at half the price that is just as capable, if not more so.  In other words, handset financing doesn't seem to make sense on any level.  My advice is to stay strong, set your goals (ex. save $500 within 8 months = $62.50/month = $2.08/day), then buy the phone at that time.  You'll end up with a better phone, and and won't have to give up any hard-earned money to these financing companies for something as trivial as a high end smartphone.

If you lost or damaged your existing phone, and are in a situation where you can't wait to save up, I recommend looking for an older or used phone on eBay, or buying a certified pre-owned smartphone from a trusted company like Gazelle.

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