Smartphone plans: are contract or monthly payments better?

Choosing a smartphone can be a complicated process and committing to a cellphone provider even more so.

The key question being: Am I better off receiving a free or discounted phone by signing a two-year contract - or should I buy an unlocked phone and pay month to month?

To get some answers, CBC Radio asked our guide to personal finance Mark Ting to crunch the numbers on smartphone long-term contracts versus month-to-month payments. Here's what you need to know:

Contracts

What are the benefits of signing a two-year contract?

Committing to a two-year contract allows you to choose from a wide selection of smartphones at a low, upfront price. It is a good choice if cash flow is your primary concern, but it could cost more over the long run as your monthly payments will be higher. Your "free" phone is not free — it is likely a $700 phone, the cost of which is amortized, or gradually paid off, over the length of the contract.

Any tips for people whose contracts are coming to an end?

Yes. Never go over your contract.  What happens when your contract expires is that it automatically becomes a month-to-month arrangement at the same price. That is not a good thing as the contract amount included the cost of your phone and the service. Once the contract is up, the phone is all paid up, so there is no point paying the higher monthly fee. Again, you have a couple of choices: get a new phone and sign up for another two-year contract. Or, if your existing phone still meets your needs, ask for a discount or unlock the phone and go to a lower cost provider.

What happens if I’m in a contract and my phone breaks or I lose it?

It isn't the end of the world. Under those circumstances you would just buy a new or used phone — or even borrow a phone — from someone.  Phone technology changes so fast and new models come out every six months to a year. That means there is a huge "lightly used" phone market as many people ditch their year-old phones for a latest version. Bottom line, the value of a phone drops significantly as soon as a new model comes out so there are plenty of very good phones to be had at discounted prices.

Rather than break the contract and pay a penalty, get your hands on an unlocked phone and just buy a new SIM card to restart your service (a new SIM card only costs between $5 and $10).

Unlocking

How does unlocking a phone work?

If you sign a contract with one of the major carriers and receive a free or reduced-price phone it will be locked to that service provider. For example, if you are with Telus, your phone will only work on the Telus network. People complained about this as they wanted the option to shop around for a better deal, so now providers will — for a fee — unlock your phone so it is a free agent and can be used anywhere.

How much does it cost to unlock a phone?

It isn’t too bad. I checked all the major telecoms providers and the prices range from $35 to $50. There were some stipulations that you had to be with your carrier for 90 days before unlocking, but that usually wasn’t an issue as most of the locked phones come with the two-year contract. If you were to buy a phone outright, say from the Apple Store or from Amazon, those would already be unlocked.

If you have an older model phone, it is sometimes cheaper to go to unlocking services on the internet such as unlockthatphone.com. One thing I will say about these services is to read the reviews first, to see if they are legit and to stay away from the "free" unlocking websites, as some of them might be scam.

Is it worth paying the unlocking fee?

Having an unlocked phone just gives you flexibility. If you travel a lot it can be very useful. In Asia or Europe, where cell plans are very cheap, you could buy a new SIM card at the airport and use a local number rather than paying high roaming charges.

Another benefit of having an unlocked phone is that you can take advantage of promotions. With an unlocked phone you are basically on a month-to-month contract. If another provider has a promotion, you can easily jump ship and sign up without penalty. With a contract you would not have that option unless you broke your contract which can be very expensive.

Moving providers

How easy is it to move from one provider to another if I want to keep my current phone number?

It is very easy. You call your current provider to let them know you are cancelling services. They will ask why and might match the offer of the other provider, which is good as you have just reduced your cell bill with one phone call. Otherwise they will give you a last date of service. A day or two before you lose service, go to your new provider, sign up and they will request your phone number to be ported.

Mark Ting is an investment adviser with HollisWealth, a division of Scotia Capital. You can hear his full interview with On The Coast's Stephen Quinn by clicking on the audio clip labelled "Mark Ting on smartphone pricing."