New contract with mobile to pay debt or cheap sim only??

Blueade

Hi all,

First post here and I’m after some advice. I currently have a phone contract with 3 which is costing me around £50 per month but it’s due to end in December. I have 2 choices, I can either do what I did 2 years ago and renew my contract for £50 per month, get a brand new iPhone which I can sell on eBay for ~£700 (and keep my old one) which would pay off almost all of my credit card (which has a high interest rate and on which I can only make minimum repayments); or I can switch to a Sim only deal for £10 or £15 a month. The part of my brain which I’m trying to retrain into a money saving machine tells me the cheap sim is the smarter deal, but it is tempting to be able to pay off a big chunk of debt if I get an upgrade....

Any advice welcome

eDicky

Ask yourself whether the £50 per month is going to put you right back into the same level of debt, or perhaps worse. Only you know this. Have you looked into balance transfer to a 0% card possibilities?

Overall it's usually better to avoid paying a network their level of profit on phone contracts, and stick to SIM-only which can be less than £10/mth.

grumbler

£700 loan over 24 months with £50-£10=£40 monthly repayments means 38% annual interest rate (2.7% monthly).

As simple as that. Compare this to your card rate.

mobilejunkie

grumbler wrote: »

£700 loan over 24 months with £50-£10=£40 monthly repayments means 38% annual interest rate (2.7% monthly).

As simple as that. Compare this to your card rate.

Actually it's 37% over two years so the APR is a lot less (£40 x 24 = £960 - £700 / 700 x 100 over 24 months).

Bear in mind that the OP may not be able to resist spending some of the £40 p.m. instead of using it to pay off the existing debt. On the other hand there will be the good old RPI increases to add to the cost (much higher on the £50 contract.

It's not quite as simple as it may appear, though personally my general instinct would be to go for the lower monthly cost instead of tying in to a hugely expensive monthly contract for 24 months to fund a £700 up front "benefit". There are lots of assumptions too; is the sale value net or gross of costs? Will that be the actual price achieved? How disciplined is the OP? Are there cheaper ways of paying off the existing debt? Can you get a cheaper contract than £10 per month (sounds expensive by my standards).

[Deleted User]

Blueade wrote: »

Hi all,

First post here and I’m after some advice. I currently have a phone contract with 3 which is costing me around £50 per month but it’s due to end in December. I have 2 choices, I can either do what I did 2 years ago and renew my contract for £50 per month, get a brand new iPhone which I can sell on eBay for ~£700 (and keep my old one) which would pay off almost all of my credit card (which has a high interest rate and on which I can only make minimum repayments); or I can switch to a Sim only deal for £10 or £15 a month. The part of my brain which I’m trying to retrain into a money saving machine tells me the cheap sim is the smarter deal, but it is tempting to be able to pay off a big chunk of debt if I get an upgrade....

Any advice welcome

Repost in the 'The Debt-Free Wannabe Board', https://forums.moneysavingexpert.com/forumdisplay.php?f=76

There will be more specialised knowledge in there I think.

I highly suspect that the advice above mine will apply, go SIM only and look at reducing the % rate you're paying and use the money saved to pay the debt off quickly. This will put you (eventually) on an even keel and hopefully (similar to an addict I suppose) you won't regress.

grumbler

mobilejunkie wrote: »

Actually it's 37% over two years so the APR is a lot less (£40 x 24 = £960 - £700 / 700 x 100 over 24 months).

My Excel calculation
=RATE(24,-40,700) = 2.7%
=(1+2.7%)^12-1 = 0.376


Your calculation is for the total interest over 2 years, not the annual rate that reflects gradual decrease in the amount you owe.

mobilejunkie

grumbler wrote: »

My Excel calculation
=RATE(24,-40,700) = 2.7%
=(1+2.7%)^12-1 = 0.376

Your calculation is for the total interest over 2 years, not the annual rate that reflects gradual decrease in the amount you owe.

Logically that formula (or its interpretation) simply cannot be correct in the way you have used it.

If you were borrowing £700 at 38% APR then the additional cost would be £266 in the first 12 months alone. I think you are looking at the formula from the wrong way round i.e. if you were to charge £40 per month over 24 months, whereas the OP would be gaining £700 up front as a lump sum and paying an extra £260 over 24 months for the privilage.

ballyblack

get a brand new iPhone which I can sell on eBay for ~£700

Since you do not own the phone outright is that not illegal?

grumbler

mobilejunkie wrote: »

If you were borrowing £700 at 38% APR then the additional cost would be £266 in the first 12 months alone.

This is only if each month you pay only interest (~£20).
I am surprised that I have to explain you such basic things

grumbler

ballyblack wrote: »

Since you do not own the phone outright is that not illegal?

Most likely he does - unless the contract says otherwise

PixelPound

mobilejunkie wrote: »

Bear in mind that the OP may not be able to resist spending some of the £40 p.m. instead of using it to pay off the existing debt. On the other hand there will be the good old RPI increases to add to the cost (much higher on the £50 contract.

On that note bear in mind that by the time the OP gets the £700 there may be calls on it for Christmas, or if the card is paid down then could be run up again because paying the £50pm contract.

APR of 37.6% sounds right plugging it into http://money-saving-calculators.prudentminds.com/apr-calculator.html

so really not cheaper to sell the phone but instead set up a DD to repay the card of £40 above the min repayment would normally be paying.