8 min read

What is unbundling?

Hannah Patnick
9 June 2017

We explain what ‘unbundling’ is and how it could be a cheaper way to approach your next mobile phone contract.

Unbundling is a new way to approach taking out a phone contract. It’s potentially going to change the face of the mobile phone market, taking control away from the networks and putting it into the hands of consumers.

Here, we’re going to explain what ‘unbundling’ is and how it differs to a standard phone contract.

What is unbundling?

Unbundling is when you buy your phone plan, handset and handset loan separately – as opposed to going for a traditional phone contract which rolls it all up into one monthly price.

The key difference between ‘unbundling’ and a traditional phone contract, is the way you spread the cost of the handset. When you unbundle, you actively take out credit to cover the cost of a handset (usually in the form of a small personal loan).

With a traditional phone contract, the cost of your handset is hidden within your monthly bill. It isn’t listed as a separate cost, which means a lot of us assume the handset is free when it comes with a contract. But in reality, you’ll probably be paying for the price of the handset as well as 'interest' for spreading out this cost.

Although spreading the cost of your handset isn’t technically called a ‘loan’, that’s effectively what it is. But because it isn’t called a ‘loan’ the network doesn’t have to show you the APR you’re being charged. This means you’ll never know exactly how much you’re paying for the handset over the course of your contract, and you can’t make sure you’re getting a competitive rate of borrowing.

What is APR?
APR stands for Annual Percentage Rate. This tells you how much it’ll cost to borrow money over the course of a year. So, if you borrow £100 with a 10% APR, this will cost you £10 over the course of a year. APR includes the interest you’ll pay on the debt and any upfront fees such as handling fees. It is a legal requirement that lenders show you the APR on any credit they advertise. This means you can compare the cost of borrowing across different types of credit, from different companies.

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The advantages of unbundling

It can save you (a lot of) money on your handset

If you want to spread the cost of a new handset, unbundling can significantly lower the price. This is especially the case if you tend to forget to renew your phone contract at the end of the term, as you could be paying full whack for your handset as the 'loan' period will have finished.

You can shop around for the best rate of interest

According to MoneySavingExpert, the hidden APR on a contract phone can be as high as 48%, compared to around 9.7% on a typical loan. So by shopping around and comparing APRs, you could end up getting much better value for money.

You get an unlocked phone

Buying a phone separately to your contract means you’re getting an unlocked phone. This means you can choose any network you want and you can also switch out SIM cards (or use a local SIM) whenever you’re abroad. This could mean great savings on roaming charges.

Flexibility

In a contract phone scenario, you’ll often be locked into a 12 or 24 month term, especially if you want to lower the upfront cost of your phone. When you unbundle your phone, you’re not tied into a network, and you can make as little commitment as you want to a network or data plan. Depending on the plan you get, you can switch provider at any time without having to pay an early termination penalty.

As long as you pay back your loan, you can do whatever you want with the phone

If you decide to take out a credit card or loan to pay for your handset, it’s worth knowing that this money isn’t connected to the phone itself. This means, technically, you can do whatever you want with the phone, as long as you continue to make your repayments.

So if you get a few months in and want to swap your phone, you’re entitled to. (But if you’re thinking of changing your phone you may want to consider selling your old handset before you get a new one, rather than just taking out more credit).

The disadvantages of unbundling

Phone loans attract interest

While taking out a loan to pay for your phone can be cheaper than getting a phone through a contract, at the end of the day you’re still taking it out on credit. Your lender will charge interest on the amount, which will raise the overall cost of your handset.

Your credit report and score matter

As with any type of credit, your lender will use your credit history to determine how risky it is to lend you money. The best deals will only be available to you if you have a good credit score. So, if you’ve struggled to repay your debts in the past or don’t have much of a credit history, you can expect the interest rate - and, consequently, the overall cost of your phone - to be significantly higher.

We should point out that you’ll probably have to undergo a credit check you even if you’re taking out a traditional contract, as you’re still being lent money.

What you need to know about financing your phone

The cheapest way to buy any new handset will almost always be to buy it outright. However, since most of us aren’t lucky enough to have a spare £600 lying around, it’s worth looking at some more realistic options.

Depending on where you get your phone from, you have a few different options for financing your new handset:

1 - Taking out a 0% purchases credit card.

2 - A payment plan that you can take out through a manufacturer. This is still a form of credit, but unlike a contract bundle, you’ll be able to see the APR you’re paying.

3 - A small (unsecured) personal loan.

Whichever option you go for, make sure you know how to pay it back. In the grand scheme of borrowing, you might not think this is a lot of money to borrow, but if you start missing payments it can get costly very quickly. If you do miss payments or end up defaulting on your debt, this could seriously damage your credit score, which could have longer term consequences on your finances.

When you’re looking at financial options, make sure you do your research first. Be careful to read the terms and conditions and go for a deal that makes the most sense for you.

In a nutshell:
  • Unbundling means purchasing your phone plan, handset and handset loan separately.

  • When you unbundle, you know exactly how much you’re paying for your handset, unlike a traditional phone contract that rolls the airtime and phone cost into one price. This can potentially save you a lot of money, especially if you shop around for the best interest rates.

  • You can take out whatever SIM plan you want.

  • Whenever you take out credit you will almost certainly have to pay interest. The amount of interest you have to pay, and whether or not you’ll get accepted will depend on your credit history.

by Hannah Patnick

In her previous life Hannah was a consumer journalist making primetime television shows. Now she's ClearScore's Content Producer. Amongst her many talents, Hannah is famed for her excellent tea-making skills.

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