7 min read

Phone contracts vs pay-as-you-go

Hannah Salih
8 June 2017

We explore the differences between these two types of phone plan.

Should you get a new phone on a contract? Or does buying your handset and airtime separately result in a better deal?

In this article, we discuss the pros and cons and look at some of the reasons why you’d choose one route instead of the other.

Why choose a pay-as-you-go SIM?

  • Cheaper monthly cost

This is arguably the biggest advantage of a pay-as-you-go SIM.

SIM-only plans allow you to keep your current phone. You can still get the benefit of a bundle of calls, texts and minutes for a single monthly rate. But the price is significantly cheaper than a phone contract, because it doesn’t include the cost of a new phone.

  • No overpayments

Even though the monthly rate on a phone contract covers your usage and the cost of the handset, the payment isn’t usually split. Consequently, if you carry on with your contract after the term expires, you’re essentially continuing to make payments on a handset you’ve already paid for in full.

This can’t happen on a pay-as-you-go SIM, because you only pay for airtime.

  • Greater flexibility

The difference in phone contract plans is usually in the size of your monthly allowance. The basic terms are typically all the same: a 24-month commitment with an early termination fee if you cut the contract short.

By contrast, pay-as-you-go SIMs have a choice of different terms, which makes them more flexible. You can commit to a 12-month plan, a 30-day rolling plan or just pay for what you use.

  • More freedom

If you want to switch network providers it's usually easier and much quicker on a pay-as-you-go SIM, especially if you’re on a 30-day rolling plan or on just pay-as-you-go.

If you’re on a phone contract, you’ll need to wait for the 24-month term to expire before you can even think of switching. Besides, phones on contract are usually network locked, which means you’ll need to unlock your phone or buy a new, unlocked handset in order to switch.

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The different types of SIM plan
The vast majority of network providers offer three main types of pay-as-you-go SIM plans:

1 - 12-month fixed plans

These give you a bundle of calls, texts and data for a fixed monthly fee. However, you have to commit to 12 months and pay a penalty if you cancel early.

2 - 30-day rolling plans

These also give you a bundle of calls, texts and data for a fixed monthly fee. However, you’re only committed for 30 days, after which you can switch plan or even network provider altogether.

3 - Pay-as-you-go

Here, you top up your phone with credit and only pay for what you use. You can switch provider at any time without paying a penalty. However, you’ll usually lose any credit you still have on your phone.

Why choose a phone contract?

  • A brand new smartphone, at no upfront cost

When you take out a contract phone, you’ll get a brand spanking new phone. You’re usually also entitled to free repairs or replacement if something goes wrong with it within your warranty period.

  • You want an upgrade

When your contract is about to end, you have the option of upgrading to a new handset. This means you could potentially change to the latest, brand new handset every two years at no upfront cost.

  • No need to top up

Phone contracts come with a monthly allowance of calls, texts and data. And anything outside the bundle is charged at a set rate and billed on your next statement. This means you don’t have to worry about monitoring your credit and topping up.

Of course, the flipside is that you may be in for an expensive shock if you’re not careful with your usage.

Helpful hint
You don’t usually need to top up on a 12-month SIM-only plan, either. As with phone contracts, once you use up your monthly allowance you’ll be charged for any extra usage at a pre-set rate and this is added to your monthly bill. However, the rates on SIM-only plans tend to be slightly higher than those on phone contracts.

How do you choose the right plan?

Which mobile plan you should choose really depends on three factors: your level of usage, whether you already own a good phone and how much commitment you’re comfortable taking on.

Phone contracts are typically the most expensive option. They also last the longest (usually 24 months), which means they involve the highest level of commitment. However, they’re a way to get the latest handset without paying any money up front.

If, on the other hand, your phone is still in good working order, a pay-as-you-go SIM may be the better option. 12-month deals tend to be slightly cheaper than 30-day rolling plans, but not by much.

As a rule of thumb, staying on pay-as-you-go is only worthwhile if you’re a very light user. You can usually get a SIM-only plan on a 30-day rolling plan for under £10 a month. With this in mind, pay-as-you-go is typically only worthwhile if you monthly mobile spend is less than this.

Saving money on a 'new' handset
If you need a new phone and can’t afford, consider going for an older smartphone. Phones usually work out more expensive when you take them out on contract, so opting for an older handset may save you money in the long run.

Alternatively, you can consider unbundling your handset. This can work out cheaper than paying for a contract phone while still allowing you to spread the cost over a period of months.

In a nutshell:
  • Pay-as-you-go SIMs tend to be cheaper and give you more flexibility. However, you’re wholly responsible for maintaining, repairing or replacing your phone.

  • Phones under contract are usually repaired or replaced by the network provider at no extra cost.

  • Phone contract plans and SIM-only contract plans are usually best for average to heavy users, while a straight-forward pay-as-you-go plan is usually only worthwhile if you don’t use your phone that much.

by Hannah Salih

Hannah reads all the finance info on the web so you don't have to. She knows all there is to know about your finances but still spends all her money on brunch. 

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