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Prepaid phones: A better deal?

The average noncontract subscriber pays $61 a month -- half the average $122 bill for contract subscribers. Would it make sense to switch?

By MSN Money Partner Jun 7, 2012 4:24PM

This post comes from Kelli B. Grant at partner blog SmartMoney. 

SmartMoney on MSN Money

It may no longer pay to commit to a cellphone contract.


Image: Calling for roadside assistance (© Tom Merton/Photolibrary/Photolibrary)As carriers like AT&T and Verizon eliminate their unlimited data options and consider raising rates on voice minutes, experts say there's growing appeal for wireless plans that let users pay month-to-month.


For starters, many prepaid phones offer unlimited plans, eliminating the risk of going over on data usage. Plus, the handset selection -- once limited to feature phones and a few older smartphones -- is getting cooler, with prepaid carriers Cricket Wireless and Sprint's Virgin Mobile planning to offer the iPhone to customers as of June 22 and June 29, respectively.


Those shifts have broadened the appeal of prepaid, from its original market of consumers who wanted a bare-bones plan to those who want to talk, text and surf the Web. About 30% of prepaid phones purchased in 2011 were smartphones, up from 5% in 2009, according to market research firm The Stevenson Company. (Overall, prepaid represents 17% of handsets sold, inching up from 16% in 2009.)


The allure for the smartphone set? The average noncontract subscriber pays $61 a month -- half the average $122 bill for contract subscribers, says Ross Gagnon, an analyst with J.D. Power and Associates. (Last year, those average tabs were $60 and $84, respectively.) "It's strictly the value driving it," he says.


Still, prepaid isn't a cost saver for everyone. Consumers currently under contract should probably wait out their agreement, says Schwark Satyavolu, a co-founder of plan comparison site BillShrink. Otherwise, early-termination fees of up to $350 kick in, eating into savings from the new, cheaper plan. Even those contract customers free to leave may find that staying put could be the better option, he says: "Prepaids can be anywhere from mildly attractive to horribly expensive." (Post continues below.)

Here's what to consider before ditching cellphone contract plans:


Plan needs

Prepaid options vary widely: Some are monthly plans for set allotments of voice, text and data. Others charge fees for each day you use your phone. Experts say only very infrequent phone users -- say, those talking fewer than 100 minutes per month, who rarely use text or data -- should try a daily fee or per-minute plan. Otherwise, fees could easily tally more than the cheapest monthly plans, which offer more bang for their buck, Satyavolu says.


For example, T-Mobile's $3-by-the-day plan offers unlimited talk, text and data. Users who pick up their handset at least 17 days of the month would spend more than the $50 price of T-Mobile's monthly plan offering the same features.


Prepaid plans can be a smart idea for parents who want to curtail a teenager's use, says Todd Day, an industry analyst for consulting firm Frost & Sullivan. "Basically when the allotment runs out, the phone stops working," he says. That aspect can also be helpful for consumers on a budget who don't want to run into overage charges or who want to opt in for data only on certain months.


But consumers who are heavy users might find that unlimited data has its limitations: As with contract plans, most prepaid data plans push users to slower speeds after a set number of megabytes per day or month.


Service quality

Investigate before switching. All four of the big nationwide carriers have a prepaid option or brand, and quality should be consistent with contract subscribers' experiences in that area, says Satyavolu. Some regional prepaid carriers have their own networks, and others piggyback on a bigger carrier's. If a carrier doesn't have a good signal nearby, neither will a prepaid carrier using its network.


And keep in mind, small carriers that piggyback often have low priority for the bigger carrier, which could affect data speeds and call quality during times of peak traffic. "They'll drop those (smaller carriers') calls before they drop their own," Satyavolu says.


On the other hand, prepaid carriers using their own networks may have smaller service areas, Day says, and can be more easily overloaded by data-hungry users.


Handsets

In exchange for signing a two-year contract, customers get a cheap, carrier-subsidized price on their new phone. Prepaid customers pay much closer to full price for the hardware. A 16GB iPhone 4S will cost $500 at Leap, for example, versus $200 under contract at Sprint, Verizon or AT&T -- although it's still a break from the full $650 retail price.


The gap isn't as wide on other models, Gagnon says, although that's in part because it can take several months for a new handset to make its way to the prepaid market, by which time the contract carriers have dropped their prices. (Keep in mind that 44% of contract subscribers receive a free phone with a contract, according to J.D. Power and Associates. The rest paid $66 on average.)

The higher cost shouldn't necessarily be a deterrent, but consumers ought to factor in the price to determine how long they'd need to stay with a particular prepaid carrier to get the savings, Day says.


The purchase price can also effectively lock you in, even without a contract, since most carriers don't allow you to use phones from a competitor. That forces consumers to stay put or eat the loss. Tech-savvy consumers may be able to find a workaround, but such moves void the phone's warranty and don't always work. "Because of the frequency differences between carriers, you wouldn't necessarily get the same performance on the device," Day says.


More on SmartMoney and MSN Money:


8Comments
Jun 7, 2012 8:10PM
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I went no contract long ago. BUT I'm not a big cell phone user ...I paid $60 for my service....for ... a ....year. Works great for me. $122 a month for a cell phone?....That's just crazy!!!
Jun 8, 2012 8:57AM
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I pay $119 a year for my Tracfone (via the one year card, which I now buy online via Tracfone's website...the online purchase also doubles my minutes.)  However, I only use the Tracfone occasionally, when I'm on the road or away from the house.  Just try finding a pay phone anymore, if you have car trouble in the middle of nowhere.  The Tracfone comes in handy.  As a replacement for a landline or contract-based cell phone, Tracfone could be expensive.  There are some monthly cell phone plans that are a better value than Tracfone for everyday use.
Jun 11, 2012 12:11PM
avatar
$122 a month for the AVERAGE. The marketing of these big companies is genious! They have spent two decades getting folks into mpore expensive contracts with phones with more features. Each year they get further away from the initial phone calling. There is a large "tech divide" between the folks that have pre paid & the folks with contract. Since I lost my high profile job & only send an occasional test & call to my wife I have no reason for an advanced phone. My simple recycled "flip phone" works fine for $29.95 a month. Try pagepluswireless.com They use verizion and plans go up to $55. My phone has worked from New Jersey to Utah, to California. Alot less hassle than wrecking your credit with a contract u cant get out of!
Jun 9, 2012 10:26PM
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I tried Straight Talk (Walmart brand $30 per month) but it didn't work well in my area.  I went to Boost Mobile (Sprint $35 per month) and it's a terrific service.  Unlimited phone and text...slow internet, but I really don't need a smart phone and hardly use the internet via feature phone.  If you want a smart phone with fast internet, I think it's $40 per month.  No dropped calls and auto pay.  It's really been a good deal.
Jul 19, 2012 8:53PM
avatar
Been using Net 10 for 4 years now and love it. Minutes roll over buy a 300 minute card for $30 and good for 2 months. Right now I have 830 minutes which is 13 hours far more than I am going to talk in a month.  Plus I always seem to have service when others do not in some remote areas. 
Jun 10, 2012 11:49PM
avatar

yes we have that simple mobile one that you can use the att and tmobile phones and you can use unlimited talk text and web and you can do unlimited international text

we also have the tmobile prepaid withc is 50 dollars unlimited talk text and web  but the like all the big carriers they cap the iternet that is the same case with boost mobile too even sprint they cap they all claim unlimited but ther is not a true unlmited

celulap dot com

Jul 9, 2012 7:19PM
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I see a business opportunity here. Do you? Hehehe. I am going to get stinking rich. Hehehe.
Jun 10, 2012 11:44PM
avatar

Celulap we offer the plans that contract carriers dont want you to know about

you can  use the verizonwireless 3g  phones and the gsm att and tmobile phones and

get unlimited data

celulap dot com

we sell you the sim card

 

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