Are No Contract Plans Actually Better Than 2 Year Contract Plans?

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With two-year contract cell phone plans out the window, most of us want to know if new plans are all they're cracked up to be.

Although new unlimited "no-contract" plans with installment agreements sound great, there are several caveats you should heed before you purchase a so-called no-contract plan.

Some companies allow current customers to keep their contract plan if they choose, which leaves them wondering whether to switch plans or stick with their original contract. Unfortunately, you won't be able to switch back to a contract once you take the leap.

If you're not sure where to go next in the vast world of wireless, I'm here to help. Below, I will summarize the pros and cons of old contract wireless plans and new no-contract plans. I will also break down the different ways you can pay for a phone so you know what you're getting yourself into before you agree to anything permanent.

The New Way to Buy a Cell Phone Plan

Installment and leasing agreements are the new contract plans. In fact, they are the same as contract plans, except they are essentially contracts for your phone purchase instead of for your phone plan. Installment and leasing agreements compliment your no-contract cell phone plan if you don't want to pay for a new phone upfront at full price.

Contract plans, on the other hand, allowed you to subsidize your phone by raising your monthly bill. You would pay less for your phone up front by paying more on your monthly bill with both agreements.

The only difference is that no-contract plans charge $0 up front with lower monthly rates once you satisfy your agreement by paying off your phone. Contract plans, on the other hand, never lowered your rates once you fulfilled your agreement and still charged you a couple hundred bucks for a new phone.

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In other words, companies have gone from trapping you into their service for a certain amount of time because of your cell phone plan to trapping you into their service because of your phone purchase.

Although all new wireless plans have a leg up on contract plans because of no more overage fees, they're not that much better. Let me explain.

Are No Contract Plans Actually Better Than 2 Year Contract Plans?

Contract Plans Are Being Phased Out

Contract plans have become the black sheep of the wireless industry with the arrival of installment and leasing agreements. On the other hand, contract plans did have their benefits. Here's the low-down on the good and the bad.

Pros

You could get a subsidized phone

The best part about a contract plan was that you could purchase a new phone at a subsidized price in exchange for a commitment. If you didn't want to pay full price up front for an expensive new iPhone every couple of years, a contract plan helped you out.

You could get locked in monthly rates

If you've ever had a contract plan, you may have been able to get a locked in monthly rate. This means you wouldn't have to worry about rate hikes on your bill. If your wireless company wanted you to renew your contract, they were sometimes willing to negotiate price locks.

Cons

You couldn't leave before your contract was up

You would have to stay with the company until your contract was up. If not, you'd have to pay a colossal early termination fee.

You could only get a subsidized phone when your contract was up

The bad part about getting a subsidized phone on a contract plan is that you would have to wait until your contract was up to get a new phone. In other words, you could not buy a second phone at a subsidized price before your contract was up, even if your phone was broken, lost or stolen. In that case, you would have to pay full price for a new one.

You had to pay hidden fees and your rates never went down

Here's something most of us on contract cell phone plans never realized: contract plans subsidized the cost of your new phone via higher monthly bills. Although wireless companies made it seem like you were paying less for the phone altogether, you were actually paying the difference off on your monthly bill via hidden fees.

This information was revealed back in 2013 when T-Mobile came out with their Uncarrier initiative and explained the truth about two-year contracts, according to Phonedog.com. The worst part? Your bill stayed the same even after you fulfilled your contract.

You may have been charged overage fees

Contract plan agreements traditionally included hefty overage fees when customers went over their allotted amount of minutes or data. With so much competition within the wireless industry these days, most wireless providers have done away with overage fees altogether. However, if you haven't switched your contract cell phone plan in a while, you may still be dealing with overage fees.

You had to go through a credit check

Before you could sign up for a contract phone plan, your phone company wanted to make sure you had a history of paying your bills (preferably on-time). As a result, you would have to submit to a credit check before locking down a contract phone plan.

Read more: How to Switch Your Cell Phone Carrier

No Contract Plans Make it Easier to Switch

New no-contract plans with installment and leasing agreements are a little better, but they have their disadvantages just like contract plans. New plans do provide more bill transparency for customers, however, according to the Huffington Post. Here are the pros and cons.

Pros

You can switch carriers and plans whenever you want, sort of

The best part about the newest cell phone plans is supposed to be that you can switch or cancel your plan whenever you want. In reality, however, you can only do so if you pay for your phone upfront with no installment or lease agreement.

Unfortunately, many new wireless providers require you to enter an installment plan or leasing agreement in order to qualify for their newest plans and promotions. For example, they may require it if you want to have your early termination fees paid for when you switch carriers before your agreement is fulfilled.

You will usually pay less than with a contract plan

Instead of paying a smaller upfront amount for a subsidized new phone with slightly higher monthly rates that never go down, you'll pay $0 up front while agreeing to a higher monthly bill over a set period of time to pay off the phone.

Once you've paid it off, your bill will be reduced significantly. This is one of the major advantages of an installment plan over a contract plan; your bill has the potential to go down instead of staying the same or getting higher.

You can upgrade whenever you want, sort of

Another plus side to new plans with installment and lease agreements is that you may be able to upgrade to a new phone whenever you want. Some companies do it better than others, however.

For example, Verizon Wireless allows you to upgrade only once you've paid off your device. T-Mobile and AT&T, on the other hand, have plans that allow you to trade in your phone for a new one even if you haven't fully paid it off.

You can purchase a BYOP plan once you've paid off your phone

Another cool thing about installment plans is that you don't have to immediately enter a new contract or agreement as soon as you've paid off your phone. This means you can even bring your phone into a bring your own phone plan if you want.

BYOP plans let you use your old phone or the used phone you bought after trading in your old phone instead of making you buy a new one from your carrier. If you want a more advanced phone for a cheaper price, a BYOP plan may be the way to go once you've paid off your installments. You can use our tool to compare the best BYOP plans and save money.

No more overage charges

The newest plans from the most popular wireless providers don't charge overage fees when you surpass your allotted data. Instead, they will throttle your data speeds until that billing period ends and the next one begins. You can choose to buy more high-speed LTE data for a certain price per gigabyte if you want to.

This is a huge improvement from contract plans that charge huge overage fees for going over even the slightest amount. Keep in mind, however, your overage fees have nothing to do with your installment or lease payments, they have to do with your service plan.

Your bill will be easier to understand

With new no-contract plans, your bill will be much more transparent than with an old contract plan. One reason for this is wireless companies used to charge extra fees to make up for your subsidized phone, often times without letting customers know. Now, wireless customers know they'll be paying extra for their phone on a monthly basis when they sign up for a plan; it's no longer a secret.

Cons

You still have to worry about early termination fees

Even though it's not called a contract, you're still entering a legal agreement when you sign up for an installment plan or leasing agreement. This means you can't necessarily switch carriers whenever you want. If you decide to cancel your plan before you pay off your phone, you will still likely have to pay an early termination fee

Early termination fees usually range from $100-$350 per canceled line depending on how much time is left on your agreement. If you cancel your service after you've satisfied your agreement by paying off your phone, you won't have to worry about a termination fee. Here's a guide on how to avoid early termination fees altogether if you're interested.

You still have to worry about hidden fees

Although you no longer have to worry about overage fees and higher service plan fees as a result of subsidization, hidden fees are still out there. For example, you may be charged an activation fee per line on top of other taxes and fees without being told ahead of time, even with a newer plan.

The only difference with a new plan is that extra fees now have nothing to do with your phone installment or lease payments like they did with contract plans. You won't pay more without knowing just to subsidize your phone. Fees will either be included or not included in the price of your service plan. T-Mobile is now the first wireless company to include all taxes and fees in all of their service plan prices.

You may still have to do a credit check

If you end up signing up for an installment or lease agreement, you'll usually still have to undergo a credit check. It makes sense if you think about it. When you don't have to pay a dime for a new phone up front, cell phone companies want to make sure you can afford to pay for it monthly.

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Which is Better: Old Contract Plans or New No-Contract Plans?

Overall, it's obvious that new so-called "no contract" plans are not all they're cracked up to be. However, they are still a much better option than traditional contract plans. You'll end up paying a lower monthly fee once you've paid off your phone and you'll have a little more freedom to upgrade and switch plans or carriers.

cell phone contracts were a rip off

The Different Ways To Pay For Your Phone

There are several different ways to pay for your new phone depending on your plan agreement. We believe it's important for you to understand your payment options before you purchase a new phone and wireless plan. Read on to brush up on the details.

Buy a Phone with a One or Two-Year Contract Plan

One and two-year contract plans were made to keep customers with their provider for a certain amount of time. As a result, you used to be able to pay less for your new phone up front in exchange for your commitment. The catch was that you would end up paying a higher monthly fee from your provider to make up for the subsidized price.

In other words, you didn't really get anything in exchange for your commitment to a contract plan. Also, contract plans did not allow you to upgrade your phone at a subsidized price whenever you wanted; you would have to wait until your contract was up.

If you're still on a contract plan and would like to know whether or not to switch to a new, no-contract plan, it depends. Do you have a family plan with a price lock that can't be beaten? You'll have to compare cell phone plans to figure out your best option.

Pay to Own Installment Plans

The most recent wave of smartphone plans provides the option for you to pay the full price for your phone via a monthly installment plan. The best part is that you don't have to pay any money at all up front. You'll simply pay a certain amount extra on your bill each month for a certain amount of time to pay off your phone.

The catch is that you'll be stuck with the company until you pay it off; otherwise, most companies will charge an early termination fee. The good part, however, is that you can keep your phone and sell or trade it for a new one when you're ready once you've paid it off. If you don't want to sell or trade in your phone right away, you'll enjoy low monthly rates until you upgrade. If you want to upgrade before you've paid off your phone, you can do that too.

Lease a Phone with an Early Upgrade Plan

You can also choose to lease a phone for a cheaper monthly price than buying one on an installment plan. When you lease, you are usually allowed the option to upgrade your phone at any time. The only problem is you won't own the phone at any point, so you won't be able to sell or trade it in if you want to get a new one.

Instead, you'll always pay full price for a phone via your monthly bill. This means your bill won't go down at any point after you get your new phone. According to the New York Times, you will end up paying more over the life of your wireless service if you choose to lease instead of pay a monthly installment charge or full, upfront payment. Leasing a phone is great for those who like to upgrade often, but bad for those who want maximum savings.

Pay Up Front

The other option is to simply pay for your phone upfront in full. This will help you avoid a contractual agreement altogether. If you don't have a contract or an installment or lease agreement, you also don't have to worry about credit checks, early termination fees, or higher monthly rates until you pay off your phone.

The only possible problem you may come across is when it comes to promotions. Some plans and promotional offers require you to sign up for a lease or installment plan to be eligible. For example, if you want to switch to Sprint and have your unfinished contract or agreement bought out, you'll have to sign up for a lease or a monthly installment plan first.

Read More: Why the Confusion of the Cell Phone Market Has Caused Millions to Switch

What Will Change?

Now that we can essentially finance and pay off any phone we want no matter how expensive, many people are opting for more expensive phones, according to Wired. Additionally, it seems that many people are opting to keep their phones longer and upgrade or switch plans later.

This saves them money on monthly bills until they decide to upgrade or switch. It also gives them the option to sell or trade in their phone for a new one whenever they decide to upgrade, offsetting the cost of the new phone. If you want to have your contract bought out, however, you'll probably have to make some sort of commitment.

Related: Do You Really Need Unlimited Data?

Find The Best Plan for You

Now that you know all there is to know about two-year contracts and their replacements, you're ready to make an educated decision. To go one step further, you can compare plans and check out possible savings when you switch using our cell phone plan savings calculator.

The savings calculator will tell you which plans are the most affordable for you in a matter of seconds. All you have to do is enter your carrier, number of lines, current data limit and how much you pay per month. Additionally, don't hesitate to leave me a reply in the comments if you have any unanswered questions regarding contract plans vs their replacements.

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