3 Big Downsides of Financing a Phone

If you've bought a new phone in the past couple of years, chances are that you financed it.

With the typical smartphone costing hundreds or even thousands of dollars, it's understandable that you might not want to pay for it upfront out of your bank account -- especially when phone companies make it so easy and effortless to pay for it over time.

While it may seem like a smart move to just pay for a phone over time, there are actually three big personal finance downsides of doing so. Here's what they are.

1. Financing makes it harder to understand the total cost

When you finance your phone, you'll find out at the store what your monthly payments will be. These will just be added onto your cellphone bill along with the amount you're paying for your service.

Unfortunately, it can sometimes be really confusing to figure out just how much you're actually spending each month and over time for your upgrade. I know whenever I've gone into the phone store, the transaction always involves various promotions, trade-ins, and potential changes to my service package -- so by the time the salesperson tells me what my new monthly payment will be, it's hard to tell what amount is for the phone versus for the other components of my bill.

Even when you ask how much a phone costs each month, this isn't always straightforward because people have different upgrade eligibility on their plans so the advertised monthly payment isn't necessarily going to be the same for everyone. On one major phone carrier's website right now, an iPhone 15 Pro is advertised as "starting at $41.67 per month," but if you go into the store, you may pay a very different price since that's just what the phone prices start at.

Breaking down the payment into a bunch of small monthly chunks also makes you forget just how much you'll spend over time. It may feel OK to spend $41.62 a month for 24 months, but when you look at the fact that adds up to about $999 over two years for a phone, that becomes a little more questionable in terms of whether you're getting enough value to justify such a big expense.

If you feel as if you need the latest and greatest phone, saving up and paying for it in cash instead of financing it would help drive home the point of just how many of your working hours went to pay for it. This way, you can make a more informed decision about whether it's worth it.

2. Financing encourages upgrade culture

Another big problem is that financing can spur upgrade culture. If you're just making a monthly payment for your phone along with the service, you may not feel as if it's a huge financial burden -- even though that's money you can't use for other things.

Since you don't have to come up with a huge sum to put on your credit card each time a new phone comes out, it feels easy and natural to just run to your phone carrier and finance the next one. The problem is, you can end up constantly making a payment toward the newest phone forever if you do this.

Say, for example, that every single month for the next 30 years, you devote $41.62 per month to payments on a new cellphone since upgrading is so easy and you can work the monthly payments into your budget. If you'd instead invested that money and earned a 10% average annual return, you'd have about $80,948.51 at the end of that time. Are you OK with losing over $80,000 of potential money just to have a new phone every two years?

For most people, it does not make sense to upgrade their phone once a year, or even once every two or three years. The price is just too high given there's often not that much difference between one model and the next. Don't let the promise of low monthly payments convince you to buy new technology annually when your old one is still working just fine.

3. You'll be locked in with your phone carrier when you finance your phone

Finally, if you're on a payment plan with your phone provider for a phone, you're going to have to stick with that carrier or come up with the money you owe for not following through on buying the phone on your plan.

If you want to switch to a different company to handle your cell service, you'd be out of luck. This means you can't shop for the best deals, so you could find yourself with a plan that's more expensive than it should be.

For all of these reasons, try to avoid financing your next phone. Buy one only when you need it and have saved enough to cover the costs out of pocket.