Is Prepaid the Way to Go?

July 8, 2012— -- If you own a smartphone, you know what it's like to be trapped in a two-year contract. You probably also know that breaking that contract results in a staggering cancellation fee.

That's why some people prefer prepaid phone plans. According to one tech research firm, no-contract phones now account for nearly 25 percent of the U.S. market, up from 17 percent just a few years ago.

With no-contract carriers, you pay by the month and can drop the plan at any time. Depending on what's happening in your life, this can save you money and aggravation.

In the past, most prepaid phones were frankly lame. If you wanted a top-of-the-line iPhone or Android you had to get married to AT&T, Sprint, Verizon or T-Mobile.

The prepaid playing field has shifted significantly now that Google has begun selling a contract-free Galaxy Nexus, and the iPhone has made its way to major prepaid providers.

The long-term cost-savings of these phones and month-to-month plans are very compelling. If you can afford the full, upfront price of the smartphones, you can save hundreds of dollars over the life of a typical two-year contract.

Let's launch the calculator app and take a closer look.

A 16GB iPhone 4S will cost nearly $2,400 over two years with AT&T or Verizon. That includes the subsidized phone cost of $200, plus $90 per month for data, texting and 450 minutes. A subsidized Sprint iPhone 4S costs $200 and $80 per month for unlimited use; that's a 2-year total of a little more than $2,100.

At Sprint-owned Virgin Mobile, you need to fork over full price for the iPhone 4S — $650.

Yikes!

But combine that with the $40 monthly plan — 1,200 minutes and unlimited text and data — and you'll spend just $1,610 over 24 months. If you can get by with the $30 monthly plan's 300 minutes, you're total cost drops to just $1,370. That's a cool $1,000 less than AT&T and Verizon.

Virgin Mobile's unlimited $50 monthly plan for iPhone is somewhat less appealing at a 2-year cost of $1,850.

Cricket Wireless offers one unlimited monthly plan for $55 and charges $500 for the iPhone 4S. That's a 2-year cost of $1,820. Cricket's iPhone should appeal to travelers because its SIM card is unlocked for international use.

But there are other drawbacks. The Cricket iPhone is otherwise locked in the U.S. The Virgin Mobile iPhone is locked, too. That means if you stop monthly service, you'll need to get a new number to resume cellular service with a new carrier.

Those unlimited data plans come with an asterisk, too. If you start burning over 2GB of data use, Cricket and Virgin Mobile will throttle you to painfully slow download speeds.

And then there are the networks. Cricket is an independent company that relies on Sprint to fill in gaps on its own network. Virgin Mobile, of course, uses Sprint's nationwide network.

Before buying, you need to put a prepaid iPhone through some vigorous 3G data and calling tests to see how well it performs in your town.

Are you starting to think about a 4G prepaid Android smartphone instead?

Google sells an unlocked version of the powerful Galaxy Nexus for $349. In addition to 4G, it has 16GB of storage, a gorgeous AMOLED display, near-field communication, the Android 4.0 operating system (upgradeable to 4.1) and more.