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For example, currently Verizon is advertising an iPhone 6s for either $649.99 or 24 monthly payments of $27.08, i.e., $649.92, which is essentially equal and there is no interest.

The obvious advantage of the 24 installments is that you don't need $650 available, while the obvious disadvantage is that you have to keep making payments for two years.

Are there non-obvious benefits and drawbacks to this type of offer? Why would you choose one or the other option?

(In this particular case, I believe that under the new "Verizon Plan", there's no phone service contract, i.e., you could change to another provider for service but continue to pay Verizon monthly on the phone.)

iphone ad

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    There's no contract to keep you with Verizon for a fixed period, but I recall there being a condition that balance on the phone is due at cancellation, so you couldn't switch to another provider and continue the monthly payments. – yoozer8 Mar 3 '16 at 13:40
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    The obvious disadvantage is that the thought of 0% interest could persuade you to pay $649.99 for a phone which will be obsolete/unfashionable long before the two years are up, when you could buy a fully functional but unfashionable phone for probably under $100. – jamesqf Mar 3 '16 at 18:09
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If (and only if) there is a zero interest installment plan available, technically the only uncontrollable risk is that there will likely be a hard inquiry on your credit report which may or may not also have a corresponding debt obligation attached to it. (Personally, I recently signed up for one such plan with Google and I had a hard inquiry but no debt added to my report). The other risks are that 1) your monthly payment goes up, so if you are living on a tight budget the added payment might make it harder to meet your next bill, and 2) you could miss a payment which generally triggers interest to accrue retroactively at a high rate, and in some cases could be grounds for immediate repayment.

The pro / reward of these plans is that you have to spend less of your capital upfront, which you may be able to use for other purposes (presumably with a higher net present value than purchasing the item you're considering outright). A larger example would be purchasing a new car. You want to buy a $50k car and you have the cash on hand to pay in full, but you are being offered 0% interest for 36 months. You may be more inclined to take a loan at 0% with 0 down payment and invest your money in another vehicle (no pun intended) that offers you a decent rate of return and you will come out ahead in the end. Of course, this example works in a perfect world where you can get such an offer, there are no extra fees available, you aren't worrying about your debt-to-income ratio in preparation for a big purchase like a house, there isn't a higher insurance premium to consider, etc.

In short, 0% financing, be it for a phone or a car, can be a nice perk for the informed consumer who is not using the financing as a way to purchase outside their financial means, but it is offered by companies as a way to make people buy things they normally would not and, hopefully, capitalize on people missing payments in order to reap the sweet 20%+ interest rates generally seen with these offers.

In your specific situation with the phone, you should consider if you get a discount on your monthly plan for purchasing outright, or if you can get the phone subsidized if you sign a contract (and you know you like your provider enough to stay for its duration). If the monthly plan rate stays the same and you're looking at either $500 now or $500 over 24 months and you don't mind a hard inquiry, there's not much of compelling reason to pass on the financing and hold on to your $500.

  • I like the answer - but how would your example of buying a car hurt your credit utilization - that's a metric used with credit cards (credit card balances / credit card limits) unless he's using a CC to buy a vehicle (bad idea). When lenders are considering extending a loan to an individual for a home or vehicle they would be looking at a Debt-to-Income Ratio. – DukeLuke Mar 3 '16 at 17:14
  • @DukeLuke, I meant to imply debt-to-income, thank you for catching my poor wording. I'll edit the response to reflect that. – Brian R Mar 3 '16 at 17:33
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One small advantage to paying ahead is having an outstanding installment plan may preclude unlocking the phone for use on other carriers, for example during international travel. If unlocking is important, researching the particulars would be in order.


I am more familiar with T-Mobile, and will use as a specific example. If I pay upfront, I can purchase the phone from Apple totally unlocked, and T-Mobile has no say in whether I use it on another carrier or not. (This actually costs a little more, because the phone from Apple doesn't come with a SIM, and T-Mobile charges for the SIM. At least as of iPhone 5s.)

Looking at "Unlock your mobile wireless device, Unlock Requirements" on T-Mobile's website, at least some payment plans do not allow unlock until the phone is paid off. Obviously phones purchased for full price from T-Mobile start out paid off.

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I personally take the zero percent financing plans any day. I have done this with my car and the iphone 6s. The vendors are trying to make it more attractive for you to "afford" the product. It could show up on your credit report and impact the amount of money you can borrow in the future (e.g getting a home loan). The other thing I do is make sure the monthly payments are automatically paid from my bank account so I don't miss any payments

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