The way we buy smartphones is changing.
Over the last year, the two-year contract -- once the industry standard -- has slowly fallen by the wayside, increasingly replaced by phone-financing plans that give subscribers the ability to purchase a new phone with no money down.
Now, Sprint (S) is taking it to the next level, offering even cheaper phone "leasing" plans for select handsets. Sprint began the practice last fall with its "iPhone for Life" promotion, and has since extended it to some Android handsets, including Samsung's new Galaxy S6.
Is Sprint trying to pull a fast one on its customers? Or do these new plans actually offer a better deal?
A Page From the Automotive Playbook
It's easy to see why phone financing plans have proven to be so popular. Under the old, two-year agreements, consumers who wanted a brand new phone often had to pay significant down payments -- typically $200, but sometimes even more.
Phone financing spreads the cost of a handset out over a number of installment payments. The customer is still purchasing the phone, but with a financing agreement, there's no upfront cost.
Sprint's leasing program goes even further. Not only is there no down payment, but the monthly bill is also reduced. Sprint's leasing program is similar to a standard, automotive leasing agreement. Instead of purchasing the phone, customers are paying for the privilege of renting it for a set period of time -- usually 24 months, but Sprint also offers 12-month and 30-month leases.
Obviously, the cost varies depending on the model and the duration of the lease, but consider a standard, 16GB iPhone 6.
According to Sprint, customers that opt for a lease pay $7.09 less a month than customers who finance their handset, and they don't have to pay sales tax. After 24 months, that amounts to a difference of around $170 plus tax.
But Leasing Has Its Drawbacks
So leasing is the better deal, right? Unfortunately, it's not that simple.
The problem with a leasing agreement is that when it runs out, you're left with nothing except the need to pay for a new phone. The phone isn't yours -- it's Sprint's, and you've paid Sprint for the privilege of using it temporarily.
There's advantages to owning your phone. Many older handsets -- particularly iPhones -- hold their value quite well. A used iPhone 5s -- originally released in September 2013 -- still sells for upward of $300 on websites such as eBay (EBAY). Carriers often run aggressive trade-in promotions to court new subscribers, and taking advantage of them requires having an old phone to trade in. At the same time older, paid-for phones can be used with cheaper, prepaid plans on Sprint's network -- for example, Sprint offers a $35 prepaid plan with unlimited talk and text and 1GB of monthly data -- or given away to friends or relatives.
As with leasing a car, you do have the option of buying the phone outright when the lease expires, but as with a two-year agreement, you'd be on the hook for a fairly large lump payment, perhaps a couple hundred dollars.
But the bigger issue may be the loss of flexibility. With a financing plan, you have the option to terminate your service at anytime -- just pay off your phone. If you want to terminate a leasing agreement, not only do you have to pay for your phone, but also the remaining lease balance.
At the same time, leased phones must be returned in good condition. If you own the phone, and you dent it, you may be able to live with. But if it's a leased phone, you might be on the hook for any damages.
Also, leasing isn't available for every phone -- only the higher-end models, Phones that Sprint is likely confident it can resell at a later date.
Leasing vs. Financing
So, should you lease? Or is it better to buy your phone? It depends.
Sprint's leasing plans may be right for you if:
You have a bunch of old phones sitting unused in your closet.
You're a longtime Sprint customer with no plans to switch.
You have to have the latest and greatest phone every two years.
However, you may want to buy your phone instead if:
You sell or give away your old phones.
You aren't sure you plan to stick with Sprint.
You don't mind using an older phone for more than two years.
Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends eBay. The Motley Fool owns shares of eBay. Try any of our Foolish newsletter services free for 30 days. Check out our free report on one great stock to buy for 2015 and beyond.