Pre-Paid or Contract? You Decide

Is a two-year contract really a good trade for the discounts you’re getting?

All you have to do to get that huge up-front discount is stick with a cellular plan for a while, but is it fair and reasonable?  Maybe……………. if you think a straight-jacket is fashionable these days.

Why pay $649 for a new cell phone when you can get it for about one-third of the cost?  All you have to do is put your name on the dotted line, sounds easy enough.

In a lot of cases you come out way ahead with a monthly prepaid plan, but you need to do your homework.  The bottom line is the phone companies are out to get your money, but you should have to break the bank without understanding exactly what you are getting.

Here’s some background on some plans you may be, or want to consider.  Be sure to do your homework as the perfect deal is out there, somewhere.


If you want the entry-level Apple iPhone 4 with 16 GB of internal memory, both Verizon and AT&T would be happy to sell you one for just $199.  They will also tell you that the full retail price is $649, in case you’d rather not sign up for the full two-year contract that both discounts require.

What if you settled for an AT&T iPhone with a full two-year commitment and all the required extras? The asking price immediately drops $400 to $199, which is $16.67 per month over the two-year life of the contract.  Then you pick any calling and SMS text plans you like, from the low-end $39.99 option with 450 voice minutes per month and pay-as-you-go messaging to $89.99 for unlimited versions of both.

Here’s the big gotcha: You must pick a data bundle as well. The cheapest one that qualifies for your discount deal, with 2 GB of high-speed data per month, costs $25 a month. Meanwhile, the price difference between committed and prepaid calling plans is typically $5 a month, so let’s call it a $20 monthly overage.

Now, $20 times 24 is $480, so if you were thinking you could just use coffee-shop Wi-Fi connections rather than 3G/4G wireless connections, you’re paying an extra $480 for services you don’t want.

One other thing with the contract, in this case AT&T, the $325 early termination fee is prorated by $10 per month of completed service. So cancel that contract one month before it’s over, and you still get hit with a $95 charge.

With a prepaid plan, you have the option of jumping to another carrier such as AT&T, Sprint Nextel (S), or Verizon anytime you like without incurring a $325 early termination fee.


What does it all look like on paper?

I used the iPhone 4 for this example, but the same general trends hold for any smart -phone on AT&T, Sprint, or Verizon.

A basic feature phone might be available for free with a two-year contract, though they’re listed at a full retail price of $200. However, the same phone is then often available for somewhere around $50-100 with a prepaid plan, essentially a two-year discount of nothing, but you are still on the hook for the early termination fees.

This example uses one of the top Lightyear Wireless phones, the Motorola XPRT, Android 2.2 full feature phone.  The main difference in the two plans shown is in the texting and data plans.  With the AT&T plan the texting plan is additional, and the Data plan is capped at 2GB, AT&T, like most carriers, no longer offers an unlimited Data plan, the 4GB Data plan from AT&T is $45.00/month and adds another $480 in costs to the AT&T plan.

The example shows the large difference in overall costs and adding that extra cost only makes the contract plan look way worse that it already does.

This example also does not take into consideration that Lightyear Wireless has a referral program where people can actually refer a few as 3 people to Lightyear and qualify for Free wireless service up to $60.00 per month, which could reduce the prepaid plan with Lightyear Wireless by another $1,440 over the 2-years, or almost $3,000 in total savings.

Bottom Line

In the end, you’re typically weighing long-term freedom and significant savings versus short-term sticker shock of buying a $600 phone………….. even if it would save them a lot of money and headaches in the long run, some people still choose the discount on a specific phone they want and the long-term commitment that comes with it.

Phone models and functions change often and in a lot of cases pretty quickly.  So the latest and greatest phone you just got locked into with for the long-term commitment is typically replaced by something with newer technology well before you anticipated.

Funny thing is that some people just go and get the new toy and get locked into a longer deal over and over.  Like a good friend of mine always says, “Sometimes you just can’t keep people from hurting themselves.”

Good Luck