Smartphone Financing

by Anonymous

I read your article about handset financing, and found it to be very interesting, but maybe somewhat simplistic in its conclusions. Sure, it makes sense that if you can afford a monthly payment, you can simply make that monthly payment to yourself and save up that money. Once you have the cash available, you can simply go out and buy that fancy smartphone that you want. It's all about delayed gratification.

It even makes sense that by the time you save up, the phone you'll be buying six or twelve months later will be notably better than the one you would have purchased at the time had you used some kind of smartphone financing program. Sure, it's all logical and common sense, and signing a contract seems pretty lame. I couldn't agree more. It even speaks to a basic human flaw of a general lack of patience, which most modern societies, particularly North America, seems to lack.

Are companies preying on this common attitude/weakness? Absolutely! It feels logical to borrow money to buy a home, otherwise you'd be saving for 30 years, which really isn't practical. But what about cars? It wouldn't be unreasonable to save up $10K for a car, but if you want to buy a $30K or more car, the waiting period seems to get a little impractical. You could then argue that would mean that you can't actually afford that more expensive car, and that living within your means is the wise decision. Can you imagine if everyone applied "financially responsible logic" to such purchase decisions? A large part of our economy is based on the economics of "buying stuff" and financing is a huge part of the wealth of the economy; it makes the world turn. Ok, maybe it's all actually artificial, which resulted in the financial bust of 2007-2012, but that's another topic.

So back to prepaid wireless. The fact is that companies like T-Mobile started eliminating contracts, but offer smartphone financing options in its place. The bottom line is that we want things now, and we don't want, or can't afford to fork over hundreds and hundreds of dollars at one time. So the appeal of programs like T-Mobile first launched is to get people who would otherwise gravitate to postpaid contract plans. The real paradox here is that if you use smartphone financing, you're really then signing up for a contract. Though, arguably, the terms of financing within prepaid carriers are more flexible, and tend not to have elevated plan pricing like postpaid carriers do. In other words, they're a better deal, and you can easily end your financing contract any time by paying it off.

Are these programs ethical? I don't think it's a matter of what's right or wrong. It's about companies competing for customers. If they don't grow, they die. And in the wireless industry, it's hard to stay the same size. You're either growing or shrinking, and if you're shrinking, you WILL die. No one wants to "take the high road" that could lead to bankruptcy. So if one carrier is doing it, they all need to do it; of course assuming that customers gravitate towards these programs.

So, MY conclusion is that yes, smartphone financing is lame. The points you make are very sound. However, human nature, as flawed as it is, WILL prevail, and prepaid carriers need to play in the game to stay alive, and no doubt they will take that path. Like you said, at the end of the day, it's the customer's choice to decide what path to take. If we lack patience and financial will power, we'll go for the financing option. And if we have good credit, it could be at 0%, which I suppose isn't really damaging in the long run to personal finances. All in all, smartphone financing is here to stay, and customers will love it!

Comments for Smartphone Financing

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Jan 13, 2014
The Landscape Is Changing... NEW
by: PrepaidWirelessGuy

So despite my conclusion in the initial article (to stay away from handset financing), the landscape is changing dramatically. That being that ALL of the major carriers have announced that they envision a future where they will no longer subsidize phones.

What's even more interesting is that they have acknowledged that they have been building in the cost of the phone (and more) into the price of the contracted plan. So while we initially heard discussions about un-bundling, customers still wouldn't see the plan price decrease correspondingly.

Thus, we'll have a wireless market where the price of the plan decreases in exchange for removing the phone subsidy. Customers will then have the ability to choose a monthly payment over a period of time (ex. 12-24 months), often without interest, to pay for the full cost of the phone.

I still hold strongly that intellectually it doesn't make sense to finance a device that's essentially worthless a few months after you buy it (or shall I say a few months after it's released!). That said, I can see how it will be enticing for customers to justify that the extra monthly cost is similar to what they were paying before when the subsidy was hidden in the cost of the plan.

What I do like about this evolution of thought, though, is that customers will have a choice. Pay full price for the phone, get a lower monthly cost, and avoid a contract, or finance the phone and lock yourself into a financing contract. All in all, choice is key here.

Will I fork over $500 for a phone rather than take an interest free loan? It still makes sense to pay upfront for the phone, even if it means saving up for it. However, if a carrier can offer an appealing enough upgrade program, whereby I can pay a nominal additional monthly fee to be able to upgrade my phone ever year, I could see that as an appealing option. Particularly if insurance is included with a reasonable deductible (less than $100 for the highest cost phone).

While we're not quite there yet, this topic is going to represent a massive shift in the mindset of carriers and customers over the next year!

Jul 24, 2013
A Different Perspective NEW
by: PrepaidWirelessGuy

I wanted to add a different perspective, or new dimension, to the discussion on the initial handset financing page being referenced here. That being that prepaid carriers are now able to, and vigorously trying to compete with postpaid plans. This is mostly feasible due to now offering the latest and greatest smartphones, including high end phones.

The greatest challenge, however, is that customers who qualify for postpaid will often opt to get a heavily, or even fully subsidized phone. That way they can have the phone they want for $0-$200 (on average), rather than fork over $300-$600 for the same phone on prepaid.

Sure, the plan is often more expensive on postpaid, however, the initial upfront cost of a handset on prepaid (particularly the high end ones like the current Galaxy S4 and iPhone 5) is just too steep to lure them to prepaid.

In comes smartphone financing as a new "feature" that prepaid carriers are offering. This can help lure postpaid-bound customers to prepaid, as now they can not only get the phone they want without a steep upfront cost, but the plan is also generally less expensive (even with the phone financing cost factored in).

Hence, the different dimension here is a matter of context. While I believe that enticing people who can't afford a particular phone to take on debt to pay for it is wrong, luring postpaid customers to prepaid with this "tool" can make a lot of sense.

While postpaid contracts don't show up on your credit report as financing (unless you default on your payments!), it is essentially the same as eliminating the service contract (i.e. prepaid), while maintaining a financing contract.

In other words, it's very much restructuring of the legacy postpaid model, but decoupling the cost cost of the phone from the price of the plan. Postpaid carriers don't currently do this, thus even if you pay full price for your phone, you won't get a reduction in your plan price.

In summary, if prepaid carriers are going after postpaid customers to buy phones they can't afford, that's disgusting; however, if they're targeting postpaid customers with an opportunity to get a better out-of-the-door cost with a less expensive service plan, that makes good business sense.

Jun 19, 2013
Smartphone Cost? NEW
by: Brian

I think the real question here is why are these smartphones so expensive? I understand that there's a ton of technology inside these things, however, manufacturers are making huge margins. The question then becomes, do they need those kinds of margins to continue to be profitable and innovate?

At the volume they're selling these things (tens of millions of units), I would think they could continue to lower their cost, and even maintain their margins with a lower sales price. It's really only a matter of time.

TVs have become a very low margin business, and companies are still able to maintain profitability. I think the smartphone market is heading that way. They should enjoy their fat margins while they can!

May 23, 2013
The Reality Is... NEW
by: Anonymous

...That people don't want to fork over $600 for a Samsung Galaxy S4 to go prepaid. And even though you're signing a financing contract, it feels better than locking into a a general service contract. If you can get it for 0% interest, or very low interest, why not go for it! At the end of the day, whether it's wise or not, ethical or not, or whatever, carriers just want new customers, and they don't care about our financial well-being, so long as we keep paying them monthly. So, like it or not, this type of financing is here to stay!

May 09, 2013
Seriously! NEW
by: John

I agree. Do we really want to lock ourselves into a financing contract for a phone that's basically worthless a few months after it launches? Just save up for a few months and buy it. Don't let these carriers tap into our wallets simply because they're desperate for new customers.

These are supposed to be prepaid carriers. Don't let them fool you. This is no better than a postpaid contract plan at the end of the day.

Apr 16, 2013
You're Kidding - Right? NEW
by: Dave

The comment below regarding "why should I wait" is just so pathetic. You think that because it's a better option than racking up huge credit card bills that that makes it wise. Come on, really?!

The entire housing crash was due to bad debts, not only because lenders were giving out loans to people who couldn't afford them, but also because customers were accepting the offers. Financially responsible people know how much they can afford.

Financing a smartphone is just ridiculous. In my opinion, if you can't figure out how to save for a smartphone, how are you going to save for retirement, kids' expenses, college, etc. These carrier financing plans are clear examples of what's wrong with the financial mindset in this country.

Apr 16, 2013
Why Should I Wait? NEW
by: Anonymous

I'm so tired of hearing people preach that "we Americans" need to be more patient. Why should I wait a year to save up for a phone when I can easily get financing at a low rate? Think about it. Most of us would just put it on our credit cards and pay high interest rates on that. So these wireless carrier sponsored financing programs are actually a much better deal.

Sure, if I save up, I'll be able to buy a better phone at that time, but there's always a better phone around the corner. If you keep thinking that way, you'll be perpetually waiting and never actually buy anything.

I for one will all over these financing programs when my time to upgrade comes.

Apr 12, 2013
Handset Financing
by: PrepaidWirelessGuy

Here's a link to the article being referenced:

Handset Financing

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