Are "interest-free" cell phone purchase plans REALLY interest-free?

June 5, 2019 1:44 PM

My phone keeps crashing and I think it's probably time to upgrade. My carrier is Verizon and they claim that I can upgrade my phone on a 24-month payment plan with 0% APR. What's the catch?

I have the money now to buy the phone I want outright, but I'd much rather keep it in my savings account where it's earning me interest.

If the catch is just that if I switch carriers, I still owe Verizon the money, that's fine. I don't plan on switching in the next two years.

posted by capricorn to Shopping (15 answers total)

Best answer: I've done this for my last two phones and both times when I multiplied the number of payments times the amount per payment it equaled the exact purchase price. That said, when you enter into this you're on the hook for a 2 year contract, and they're extracting all manner of fees from you outside the money that's paying off your phone. Those fees just aren't necessarily any different than what you'd be paying if you bought the whole phone at once, or brought an unlocked phone in.
posted by Mr.Encyclopedia at 1:51 PM on June 5, 2019 [3 favorites]

Best answer: If you cancel service before the phone is paid off, the remaining balance comes due immediately. That's the only catch I'm aware of.
posted by Automocar at 1:51 PM on June 5, 2019 [1 favorite]

Best answer: The catches include: if you want to change carriers, you'll have to pay all the remaining cost at once (so it functions as an encouragement to keep you with the carrier); any discount/sale price is provided as a monthly rebate so you have double the encouragement to stay.
posted by salvia at 1:54 PM on June 5, 2019

Best answer: They just switched to this a few years ago and essentially instead of getting a free upgrade every 2 years, they lowered the per line pricing and you pay for the phone over 24 months instead. I upgraded my last phone this way and now it's paid off, and instead of getting a new phone at the 2-year mark, I'm several months into a cheaper phone bill.
posted by DoubleLune at 1:55 PM on June 5, 2019

Best answer: When I ran the numbers for Verizon a while back, you're still paying a bit more than you would on a prepaid plan (that is, the postpaid plan costs more, and you have to do the postpaid). Don't know if that's universally the case, though.
posted by praemunire at 2:03 PM on June 5, 2019

Best answer: The other catch to be aware of is that they may run a hard pull on your credit (there's conflicting information on this) which can temporarily dip your credit score a little bit. And it may show up on your credit report, increasing your total debt a little.
posted by Candleman at 2:13 PM on June 5, 2019 [1 favorite]

Best answer: It's not necessarily a catch on the user's end, but part of the reason why cell phone companies started doing this is that they're packaging up the payments from these plans, securitizing them, and then selling those securities to whoever. They don't need to make money from the interest because they make quite a bit from the securitization.
posted by Copronymus at 2:44 PM on June 5, 2019 [2 favorites]

They don't need to make money from the interest because they make quite a bit from the securitization.

I don't think that's right. The value of the securitization will still depend on the value of the income stream generated by the asset. (Also, these kinds of companies never make "enough" money and quit. They take all they can get.) Now, it may be easier for them to have offloaded the risk of default and the costs of the committed capital, but that's not quite the same thing.
posted by praemunire at 2:47 PM on June 5, 2019

Best answer: Apple's 24-month plan works out to be the same as their list price and they throw in AppleCare if you buy it on time. If you're considering an iPhone.
posted by adamrice at 3:41 PM on June 5, 2019 [1 favorite]

Verizon is pretty expensive. If you need the best signal, the ability to use a store for service & support, fine. Push for a better deal and you may get it; they usually provide a new phone every 2 years. Don't just renew your existing contract; prices have been falling. Assess your usage and choose the right plan.

I pay 20/ month and bought my phone at Best Buy with a carrier that puts most of my calls through over wifi. Extra data is 5/GB. It's 40% less than Verizon for 10% less quality. I'm fine with that.
posted by theora55 at 4:40 PM on June 5, 2019 [2 favorites]

Best answer: (Apple’s plan is the phone PLUS AppleCare, but no interest. I’m on my second phone that way; I kept my last one for three years. Once it was paid off the payments just stopped coming out of my account, it was painless and I didn’t have to speak to anyone. I am happy with this situation.)
posted by jeweled accumulation at 5:38 PM on June 5, 2019

Response by poster: Thanks, all! I'm sticking with Verizon, but I will explore my options between Verizon and buying a phone directly from Apple.

when you enter into this you're on the hook for a 2 year contract, and they're extracting all manner of fees from you outside the money that's paying off your phone

Just as a note, I'm already on a non-contract (month-to-month) phone plan with Verizon, so there isn't any other contract required. I think Verizon completely stopped offering contracts when they moved to 12/24-month financing for new device purchases; I know AT&T did.
posted by capricorn at 6:53 AM on June 6, 2019 [1 favorite]

Response by poster: Apple's 24-month plan works out to be the same as their list price and they throw in AppleCare if you buy it on time. If you're considering an iPhone.

After some additional research, a clarification: there's AppleCare (basic warranty), and then there's AppleCare+ (pays for accidental damage) which is only included in the iPhone Upgrade Prorgam, where the 24-month payments work out to significantly more than list price.
posted by capricorn at 9:31 AM on June 7, 2019

Response by poster: So I ended up going to the Apple Store, which I learned will actually sell you their own plan or your carrier's. I went with Apple's. Yes, the 0% interest thing is real. One thing to know is that Verizon is currently being a bear about getting your phone set up at the Apple Store, and it took about 30-45 minutes longer than expected to get my cellular service transferred over properly. But I'm glad I was able to go to the Apple Store because it was a quicker and all-around more pleasant experience than going to the Verizon Store has ever been.
posted by capricorn at 11:07 AM on June 10, 2019

Response by poster: Ah, and the one hidden fee is that Verizon charges you $40 to transfer your plan to a new device.
posted by capricorn at 11:08 AM on June 10, 2019