Breaking the iPhone Verizon Contract is Smart

by Colin Berkshire

Colin here.

What is the smartest way to purchase a smartphone (such as an iPhone). The carriers now all offer both 2-year contract prices and no-contract rental programs (Verizon calls their program “Verizon Edge”). Which is the best deal under what circumstances?

The math is a bit complicated. Pricing complexity is an essential part of telephony pricing. It needs to be complicated so that you can’t figure it out. After all, the purpose of new plans is to increase prices, not to decrease them.

I have done the math for you. My math includes all up-front fees, termination penalties, early-terminated rental fees, monthly payments, etc etc etc.

The very simple answer is the signing a 2-year agreement to get the subsidized price is a consistently better deal than the new no-contract rental prices. Even if you only keep the phone for 6-months, or 12-months, or 18-months, or the full 24-month term.

Emotionally, it is difficult to pay that termination penalty on a 2-year contract to purchase a new phone. And, it is not normal thinking to pay a contract termination fee after 6 or 12 months and then immediately sign-up for a new contract. But trust me on this: that is the better financial decision. Sign the 2-year contract and upgrade whenever you want, happily paying the penalty and reselling your used phone. Note: the monthly service price does not change, no matter if you rent the phone or go on contract.

Here is how the monthly phone costs work out:

6-Months: (Assume resale value of $400)
$7.50 on 2-year contract, early-terminated
$27.08 on rental (Verizon Edge.)

12-Months: (Assumes $300 resale value)
$21.67 on 2-year contract, early-terminated
$27.08 on rental (Verizon Edge)

18-Months: (Assumes $200 resale value)
$6.67 on 2-year contract, early-terminated
$27.08 on rental (Verizon Edge)

24-Months: (Assumes $200 resale value)
$0.00 on 2-year contract, fulfilled
$18.75 on rental (Verizon Edge)