It’s almost never a good deal buying the latest handset on a 24-month contract. We explain the hidden APRs in a mobile phone contract and why they cause you to pay hundreds of pounds more.

iPhone 7 Plus ColoursTraditionally, most people have bought their smartphones on a 24-month contract. With a contract, you can normally get the latest smartphone for a reduced upfront price. For instance, the 32GB iPhone 7 has a full retail price of £599 unlocked. However, on a Pay Monthly contract, it’s often available for an upfront payment of £99 or less.

In exchange for you being able to save money upfront, a 24-month contract will tie you in to one mobile network and will require you to pay more on your phone bill each month. For instance, you might pay an additional £30/month for the next 24 months (this is compared to if you were getting an equivalent SIM-only deal). When these additional monthly payments are taken into account, you’ll normally end up paying far more than the original cost of the handset.

In this article, we explore the hidden APRs in a 24-month contract and why they mean traditional contracts are almost never good value. We’ll then look at newer “unbundled” alternatives where you buy your handset and SIM card separately to avoid hidden APRs (this is an alternative to 24-month contracts promoted by retailers such as Unshackled).

Pay Monthly VS Unbundled Deals

Unbundled Handset and SIM
With an unbundled deal, you get your handset and SIM card separately.

In the UK, most people have traditionally bought their smartphones on a 24-month contract, where they pay a reduced amount upfront followed by monthly line rental of £40 or more for the latest handset.

Recently, unbundled deals have appeared as a new alternative in the market, providing a cheaper and more flexible alternative to 24-month contracts. With an unbundled deal, you buy an unlocked handset and a SIM card for your airtime as two separate purchases. This gives greater transparency about what each component is costing as well as greater flexibility around changing your handset or mobile network. It also allows you to avoid the hidden APRs in a 24-month contract.

24 Month Contracts

On a traditional 24-month mobile contract, you pay a reduced amount upfront for your handset in exchange for higher monthly payments over the next 24 months. For instance, the full retail price of an iPhone 7 is £599. On a 24-month contract, it’s normally available for just £99 upfront or less.

In the following table, we show what you’d currently pay for a 32GB iPhone 7 on a 24-month contract. We’ve shown the cheapest available deals with at least 2GB of data from BT Mobile, EE, O2, Tesco Mobile, Three and Vodafone:

NetworkMinutesTextsInternetUpfrontMonthlyTotal Cost
EEUnlimitedUnlimited3GB£19.99
upfront
£42.99
monthly
£1,051.75
O2UnlimitedUnlimited3GB£109.99
upfront
£36.00
monthly
£973.99
Tesco Mobile1,0005,0002GB£0.00
upfront
£36.75
monthly
£882.00
ThreeUnlimitedUnlimited4GB£49.00
upfront
£38.00
monthly
£961.00
VodafoneUnlimitedUnlimited4GB£10.00
upfront
£42.00
monthly
£1,018.00

Unbundled Handset & SIM Card

As an alternative to buying the iPhone 7 on a 24-month contract, you can instead choose to buy your iPhone SIM-free for an upfront price of £599. As you’re buying your handset outright, you can then take advantage of a much cheaper SIM-only deal.

In the following table, we show what happens when you get the iPhone SIM-free and then get a comparable SIM-only deal. We’ve assumed an upfront price of £599 for the 32GB iPhone 7, and then we’ve looked for SIM-only deals with at least 2GB of data per month:

NetworkMinutesTextsInternetUpfrontMonthlyTotal Cost
BT MobileUnlimitedUnlimited3GB£599.99
upfront
£14.00
monthly
£935.99
EE1,000Unlimited2GB£599.99
upfront
£17.99
monthly
£1,031.75
O21501502GB£599.99
upfront
£15.00
monthly
£959.99
Tesco Mobile1,5005,0004GB£599.99
upfront
£11.00
monthly
£863.99
ThreeUnlimitedUnlimited4GB£599.99
upfront
£9.00
monthly
£815.99
VodafoneUnlimitedUnlimited2GB£599.99
upfront
£16.00
monthly
£983.99

In all of the cases above, you can save significant amounts of money by buying your handset and SIM card as two separate purchases (this is known as an ‘unbundled’ package).

Hidden APRs in Contracts

iPhone 6sThe reason why 24-month contracts normally cost you a lot more is because the mobile networks charge a hidden APR when you buy a handset on contract.

For instance, at the time of writing (on the 21st December 2016), EE offers the iPhone 7 with 2GB of data for £99.99 upfront and £45.99/month on a 24-month contract. This represents an upfront saving of £500 on the full recommended retail price of an unlocked iPhone 7.

At the same time, EE also offers an airtime-only contract with the same 2GB of data for just £17.99/month. Hence, with the 24-month contract, you’re paying an extra £28/month for the exact same allowances (equivalent to an extra £672 over 24 months).

When we plug this in to the calculator below, it shows a hidden interest rate of 30.2% APR. In other words, you’re effectively borrowing £500 upfront for the handset at an interest rate of 30.2% APR. Over 24 months, this gives a monthly repayment of £28/month which is allocated towards the cost of your handset (the other £17.99/month pays for your airtime).

At the time of writing, we found the major UK networks were charging a hidden APR between 20.6% and 41.7% for customers buying an iPhone 7 with 2GB of data per month.

Hidden APR Calculator

The following calculator allows you to see the hidden APR in your 24-month contract:

24 Month Mobile Contract: Hidden APR Calculator

How much money will you save upfront with a 24-month contract?

£
For instance, if a handset normally costs £599.99 and you're paying £50 for it upfront on a contract, the upfront cost saving would be £549.99.

How much extra will you pay each month with a 24-month contract?

£
For instance, if your contract costs £47/month and and you can find a comparable SIM-only deal for £15/month, you'd be paying an extra £32/month.

Your 24-month contract has a hidden APR of 34.4%

This is because you're paying an extra £32.00/month on your mobile phone contract (£768.00 over 24 months) for an upfront saving of £549.99. This is equivalent to borrowing £549.99 and repaying it over 24 months at 34.4% APR.

Alternatives to 24 Month Contracts

unshackled-website
Unshackled is one of a new breed of online retailer making it easier to buy your handset and SIM card unbundled.

To avoid these hidden APRs, I’d strongly recommend getting your handsets “unbundled” (i.e. buying your handset and SIM card as two separate purchases).

If you’re able to afford it, the cheapest way to do this is to buy your handsets unlocked. Some good retailers for buying an unlocked handset off-contract include John Lewis, Unshackled, Amazon and Argos. Sometimes, you can also buy directly from the manufacturer (e.g. from the Apple, HTC, Motorola, Samsung or Sony websites).

If you aren’t able to spend such a large amount upfront for your handset, it can also be worth investigating a retailer that provides financing for your handset. For instance, Unshackled is an online retailer that provides financing for your handset at 9.7% APR (see our full review for more information). With their financing option, you’ll need to pay a bit more compared to if you buying the handset outright. However, the transparent APRs charged by Unshackled will normally be much cheaper than the hidden APRs in a 24-month contract. You can also settle your plan early to reduce the total amount of interest that’s payable.

Once you’ve bought an unlocked handset (either outright or with a little bit of financing), you can choose from the best value SIM-only deals available on the market. With an unlocked handset, you’ll be able to use any UK network and you’ll also be able to change mobile networks whenever you like.

More Information

For more information, please see our guide on how to buy an unlocked smartphone. If you’re buying an iPhone, you can also see our guide to buying an unlocked iPhone

Your Comments 1 so far

We'd love to hear your thoughts and any questions you may have. So far, we've received 1 comment from readers. You can add your own comment here.

  • Nice article.

    Mostly I buy my phone’s outright now, but I’m a fan of 24 month contracts WHEN THE RIGHT DEAL COMES ALONG. For example, around 4 years ago I got a Samsung galaxy ace on three’s unlimited plan for 22 pounds per month, but with around 125 pounds of automatic cashback, from the dealer and quidco. This reduced the cost to under 17 pounds a month which was cheaper than SIM only at the time. I sold the phone on ebay for about £100, reducing my cost to under 14 pounds per month.

    More recently I got a galaxy s7 with 6Gb of data for 24 pounds a month with a 70 pound upfront, but with 50 pounds cashback from quidco. This is an amazing deal representing a large and negative APR!

    But in the end these deals come and go, you have to strike when they come and be ready to take a deal even if you’ll need to sell the phone!

    Sites like mobilephonechecker also help bring 24 month contracts closer to parity with outright purchase.

    Nevertheless most of the time your article is true, you have to do a lot of contract hunting to beat the unbundling approach.

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