Sure, early upgrade plans such as AT&T Next look appealing on paper. Why wouldn’t you want the ability to upgrade to the latest and greatest earlier with little money down? However, there is a hidden cost for that early upgrade: because you don’t yet own the phone you have to return it to the carrier and therefore lose out on the resale value. And in most cases, the phone’s residual value after a year or two of use is actually greater than the remaining balance to be paid to the carrier. Let’s look at some details of the AT&T Next plans.
For a 16GB iPhone 6 on AT&T’s Next program, you have the option to buy into one of the following four installment programs:
In each of these plans, you make monthly installment payments equal to the value of the phone divided by the number of installments. So in the case of Next 24, you will pay $21.67 per month for 30 months for a 16GB iPhone 6. After 24 months you are eligible for an upgrade, but herein lies the catch. You will have paid a total of $520 towards the $650 retail price, but to upgrade you must return your current phone to AT&T. And while there is just $130 remaining to be paid off, the residual value of that phone is likely to be much higher. So you have paid more than $500 towards a device that you cannot sell for its residual value. And the residual value of the phone is most likely higher than the balance due, meaning the carrier makes out at your expense.
So what is an educated consumer to do?
Approach option #1: Forgo early upgrades
There are several alternative approaches to consider that offer a lower total cost of ownership. The best option if you are drawn to the low down payment associated with installment plans is to forego the early upgrade and instead pay the phone off in full. For example, if signing up for AT&T Next 18, you would pay all 24 monthly installments and own the phone outright rather than upgrade at 18 months and give the phone back to AT&T.
Approach option #2: Pay off balance early
For you early tech adopters that can’t resist the urge to upgrade, consider other options like paying the remaining balance on the phone and then selling it through services like NextWorth. Often the resale value will be higher than the balance owed to the carrier. This is essentially the approach Verizon took with its recent announcement that phones are eligible for upgrade any time after they are paid off in full. This gives you the greatest amount of flexibility and control over your upgrade patterns.
Approach option #3: Purchase phones outright
Finally, you should consider the economics of buying the phone outright, allowing the opportunity to sell the used device and upgrade at any point. If you purchase a new iPhone outright at $650, the resale value of that phone after one year (in good working condition) is around $350, meaning you are effectively paying $300 of the total $650 cost. This works out to be $25 per month, which falls within the mid-range of monthly installment plan costs, but gives you total flexibility and enables an upgrade every year.
If you are considering an early upgrade program, you should think again. Low money down and the opportunity to upgrade to new models sooner may seem like a good deal, but in the end you are actually paying a hefty price and losing flexibility.