A Simple Lesson on How Not to Get Taken When Making Big Purchases

This isn’t a post about the best value for a cell phone, and in fact I’m not suggesting that the cell phone I just upgraded to (a Samsung Galaxy S5 replacing my S3 that after more than two years stopped charging properly and unfortunately it wasn’t the battery).

Instead, it’s a post about how to think about and compare deals and how to approach making a financial decision. It’s one simple lesson: give yourself the time you need to think and compare and don’t be pressured to act in the moment even if you think you understand a deal’s terms.

Dealing with this cell phone my mind was working slowly and somehow I realized this.

I wasn’t making calculations clearly enough in my mind. It’s always ok to walk away. Don’t feel pressure to agree to something you haven’t worked through fully in your mind, there is just about never a reason to truly make a decision ‘on the spot’ — sometimes you can wait a day or more, but it’s hard to imagine a time where you can’t wait five minutes.

Sitting in a car dealership, something I know well, is a stressful time for many people. The amounts of money are large, and there are frequently many moving pieces. I remember sitting in car dealerships (the family business on my father’s side) and listening to salespeople talk about ‘the square’ or ‘the wheel’ showing:

  • Down payment
  • Trade-in value
  • Monthly payment

What they never talked about was the price of the car. They’d push around these numbers, maybe add in interest rate, starting high in all dimensions. The thing you should be focusing on of course is:

  1. The price of what you’re buying.
  2. The value they will give you for a trade-in, which lets you evaluate alternatives (“sell to carmax” or “put an ad in the paper”).
  3. The financing deal they’re going to give you, which lets you evaluate alternatives (long from the bank, paying cash).

But you always start with the price of the car. Make sure that is fixed. Too many moving pieces and you’re more likely to be the one that gets confused than the dealership, and agree to spend more than you intend to.

Returning to AT&T, they offer a deal called ‘NEXT’ where you don’t have to pay anything for the phone and they waive the ‘upgrade fee’ (cough). They collect tax on the price of the phone up front.

But they roll the full price of the phone into your 24 month contract. They tell you this is a good deal, because there’s no financing charge and no interest rate. That’s technically true, but it’s misleading, because there is a huge cost — an opportunity cost. You don’t actually get a subsidized phone built into your contract, they charge you the same thing for the contract and all you get is no interest financing.

Let’s look at two versions:

  • Pay $200 for the phone and $40 for an upgrade. Your out of pocket cost is $240 up front (plus tax).
  • Pay $0 up front for the phone and $0 for the upgrade. Increase your monthly bill by $25 for each of the next 24 months. Your out of pocket cost is $600 (plus tax).

Which deal is better? Granted $600 over two years is a little less in present terms than $600 today. The exact amount depends on the discount rate used (which should be the opportunity cost of the funds), but may be about $580.

Spending $240 up front is better than spending $580 in present value over two years, clearly by a very wide margin. They sell pretty hard on the value of not paying anything today.

The math is clear enough but it can take a minute to do in your head. Pause, walk away, and come back. Don’t feel pressured to make decisions on the spot, or you increase the chance of making a bad decision.

I’m not suggesting that AT&T offers good deals generally, that you can’t do better switching carriers or buying phones through third parties especially those that kick back part of their sales fee to you. I’m suggesting that this ‘NEXT’ come on is a pretty bad deal, but it can take a moment to realize it, so give yourself the time to think before signing (electronically these days) on the dotted line.


About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. “they charge you the same thing for the contract and all you get is no interest financing.”

    This is not true. If I upgrade my line on my family plan with a two-year contract than I am charged more per month, exactly equally to what I would be charged with Next.

  2. @Gary — You may want to check your math on this, especially with respect to “Mobile Share Value” family plans.

    Subsidized phone = $199+tax for phone + $40 one-time upgrade fee + $40/month access fee per line.

    Next = ~$650+tax for phone (over 24 months) + $0 upgrade fee + $15/month access for per line.

    You save $25 per month with Next, so by my math, it actually comes out cheaper.

  3. Well, I am not commenting on Gary’s math, but I bought a Galaxy Note 3 “upgrade” from AT&T in January. The woman who sold it to me started talking about all this new plan stuff (turned out to be NEXT but I don’t remember all that). I asked just to pay up front for the phone $199 + $40 and sign for 2 years like I have always in the past but I added my wife on a shared data plan. I signed whatever they asked me to and didn’t look at it for some months, 7 to be exact and then I noticed my bill said something like “payment 7 of 26 payments”.

    I went ape and went to the local store where I asked for the manager (no not the manager but the REAL manager) and explained that I had been hoodwinked and demanded it to be fixed – which she did (though she said it was difficult as I had waited so long) and I ended up paying the above amount ($199+$40) plus tax (on the highly inflated list price) – AND they unlocked my phone AND released me from my 2-year contract.

    Otherwise I would have paid substantially more – hundreds of dollars – at the end of 2 years (where the 26 months came from I can’t imagine).

    So, despite the salesperson’s deceiving practice, the manager made it right with no fuss. Of course, I have been a customer since before AT&T was even in the cell phone business (I was with Cellular One which was acquired by Cingular Wireless and then = AT&T).

  4. I would actually prefer something like NEXT pricing. The problem isn’t necessarily NEXT but how the standard phone contract is designed. Monthly rates are high to begin with because the phone company needs to cover the cost of the subsidy that lets you buy that $600 phone for $200. It spends the next two years of your contract recouping the extra $400. Sounds fair until you realize that the monthly rate doesn’t go down when the two year contract is over. It stays high indefinitely, so you keep “paying back” the subsidy long after they come out ahead.

    But other than the phone example, you’re absolutely right. Walk in, negotiate the price, and then figure out how to pay. If you can succeed I find it makes the dealer more cooperative. They’ve got a customer willing to pay X. Now the responsibility is his to find agreeable terms for payment. I got one who let me charge the bulk of it to a miles-earning credit card.

  5. The Edge/Next Plans don’t make a lot of sense for most people unless you have 10 gigabytes. On a 10gb plan with Verizon you pay the monthly $25-30 for the phone, but they give you a $25 credit on the line you have on the Edge plan. After 20 months you no longer have the phone payment but you still get the $25 line credit. If you don’t go the Edge/Next route, you should definitely head to Costco. The S5 is free there.

  6. Gary,

    Redcat is right. When you have a Next phone your line should be $25/month for plans 6gb and under and $15/month for plans 10gb and above.

    Without next current plans charge $40 per month. For a smartphone.

  7. Redact and Rob S are both correct when you speak about a mobile share plan with 10GB or more of data.

    I guess each case may be different, but as a blogger I think you need to do more research.

    NEXT plan simply offers you the phone with no interest financing and the opportunity to trade your phone in earlier. If you keep the phone, you end up paying the same amount spread over 24 months as opposed to paying it upfront.

    The one downside is that it sounds they do a credit pull to get you on the NEXT. Anyone care to confirm or deny?

  8. Yes, if you know what you are doing car dealers have a way of working with you. On my last new car purchase, I told the dealer I would pay $1,000 below his “cost”. The sales manager magically made it work by producing a de facto “rebate from manufacturer to dealer” certificate for $1,000, not offered to every customer, but reserved for use when needed.

  9. Stephan, 30 years ago, “dealer cost” was typically 15-20% below MSRP, and reflected what dealers actually paid for cars. Since then, as information about dealer cost has become more readily available to the public, the margin between “dealer cost” and MSRP has steadily decreased – today, it’s well under 10% for most cars. What has actually happened is that manufacturers provide many additional hidden incentives to dealers that make their actual cost significantly less than the published “dealer cost”. So a dealer can actually make a nice profit selling his cars at “dealer cost”. For more info, google “fighting chance new car buying guide”.

  10. Scottrick, what you’re describing is already solved by T-Mobile, you only pay the phone cost during the amortization period, and then you’re done.

  11. <—– AT&T employee here but not speaking on behalf of the company. Gary, have you had the chance to look at the new mobile share value plans? More likely than not it will provide a better value than an older type plan such as you have. Besides that as others mentioned there is a built in mechanic that gives you a discount for NEXT vs a traditional 2 year agreement along with saving on that fee, earlier upgrades, and a guaranteed value for your old phone. Honestly, we can go over the numbers side by side and I bet I can make you a believer without the car salesmen high pressure tactics. For the vast majority of consumers you come out way ahead when you combine the mobile share value plan and NEXT.

  12. Gary – also an AT&T employee here. You have my email through this post so feel free to reach out to me.

    You absolutely get a lower rate on the monthly line charge with AT&T Next when you have Mobile Share Value Plan. I will run your numbers for you if you reach out to me.

    You can change your plan, no impact to your current agreement.

    AT&T has a LOT of flexibility in our rate plans and if customers are willing to listen and not feeling they are being strong armed, we can truly show you the overall value for your dollar. I hope you reach out and update your audience on the true value of the Next offer, it’s substantial.

  13. I’ve read many comparisons of next versus traditional plans. I am opting to stay on my grandfathered unlimited plan where I get to keep my phone and sell it at the end of my contract for nearly the same price I paid.

    From my understanding, the next plan is great for those who want to upgrade early.

    I prefer to upgrade exactly every 2 years when the new iPhone comes out (4,5,6, etc.).

  14. To both Jay Vee and Mark (at&t employees), I don’t think the Next plan is a better deal for me. I have a 10GB plan with 7 iPhones. They only let you use Next with 4 lines, so right out of the box I can’t use it. But, I am also on the original 10GB mobile share plan ($120/month + $30/smartphone). I worked it out and it looks like my plan is better then Next. Maybe you can tell me what i’m missing?

  15. Rob, with that many devices, you could self identify as a Small Business and be eligible for up to 10 Next lines of service. You could also then receive an ongoing business discount.

    7 lines of service with 10GB of data would be $205/mo not counting any Next device costs or discounts applied to the recurring monthly rate. Setting up a Small Business agreement can be done over the phone, no need to go to a store.

  16. I changed our plan from the “old style” where you paid for data and text a la carte, to the new 10GB plan for 4 phones and save about $40 per month. However, my wife is really mad at AT&T and won’t upgrade her 3G because they will add on (one way or another) and additional $25 per month. I am kicking myself that I did not upgrade her phone last Christmas (like I did for my daughter) because it would have been grandfathered in. When you compare the new plan with all the data to the old (non-costly phone upgrades), it is tough to figure out which is really better.

  17. When you are using AT&T Next, you pay $25 less per line if you are using there Family Share plan, which is the subsidy. I do agree that AT&T makes AT&T Next sound better than they actually are.

  18. @Gary – I went through this recently as well, and went the subsidized route after making the same calculation and got my first bill, which was (surprise!) $25/month higher. NEXT splits the full cost of the phone over some period (usually 18 or 24 months), while the alternative is a fixed $25/month charge per line. They sell it as “You get a $25 discount on a ‘bring your own phone’ plan” – hence, if you had a phone prior to some recent date, it counted as a “bring your own” for the purposes of the plan, even if it was technically subsidized.

    So they might not have told you that your bill is going up, because, technically, you just no longer qualify for the $25 discount.

  19. My wife got the Next run-around at AT&T, that it would be actually saving her money. It took 15 minutes to get the associate to admit it, but the cheapest option by far was to keep our present phones as long as they worked. That’s because the Family Share pricing includes a $25 per line discount that goes away if you move to a new phone on the 2-year plan. From AT&T’s own ad: “Pricing also applies to customers with smartphones on 2-year agreements prior to 2/2/14 [when the $25 discount was instituted]. Discounted pricing is available as long as you keep your phone. If upgrading to a new phone discounting is only available vi AT&T Next or if you bring your own phone or pay full price.” You keep the discount with Next, BUT make monthly payments on the phone. So the cheapest route is to keep the phone you have, or to bring your own phone bought elsewhere.

  20. Ronald Man – and, if your old phone breaks, you can usually get a refurbished replacement on EBay, then activate it yourself. I’ve been doing this with Verizon Wireless for years.

  21. As others have mentioned, this is article is lacking in research and has a few faults. You need to factor in the reduced monthly payment for your line of service with Next. With that in mind, the total cost of ownership between between paying upfront and the Next plan isn’t as great as you calculated it to be.

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