If, however, you're among the majority that waits some time before getting a new phone, you continue to pay your monthly loan payments on the phone, even though it has been paid off.
It's like paying off your house and all the interest on your home loan after 15-years, but being required by the bank to continue paying your regular mortgage payments every month until you buy another house and get another loan.
That's why carriers love the whole "subsidy" shell game. It hides your loan payments in a murky payment plan that definitely covers the cost of your phone, interest on the loan they gave you, the costs associated with your actual service plus more money to profit the carrier.
There’s no "subsidy" anywhere in this plan. They use the word to confuse you into taking out a very bad loan.
The reason the scheme works and the reason consumers don't scrutinize what they're actually paying for is a flaw in human reasoning called "present bias." Humans will gladly pay more for something later if it means spending less now.
Interestingly, T-Mobile is also happy to give you a loan to buy your phone. But there are three differences.
First, when you've paid off the loan with T-Mobile, you stop making payments.
Second, they don't charge you interest on the loan.
And, third, they give you a discounted price for the phone -- for example (by the time you pay off your loan, you will have paid less than $600 for an iPhone 5).
You can also buy the unlocked phone at a discount price if you don’t take out the T-Mobile loan. For example, they charge $549.99 for the iPhone 5 ($100 less than Apple charges) if you pay the whole cost up front.
Or, you can just use the phone you already own.
In essence, they've de-coupled your monthly payment for wireless service from the loan they give you for your phone -- the cost of service is the same whether you get a loan from them to buy a discounted phone or whether you bring your existing phone onto their network.
Ultimately, it's all a shell game no matter what. Who knows, for example, if T-Mobile takes some of your money they charge you for the wireless service and use it to help discount the phone or carry the phone loans?
What's good about T-Mobile's plan is that the phones, loans and wireless service costs are all separated from each other.
T-Mobile’s new policies help shatter the "subsidy" scam that used to be nearly universal.
And the piece de resistance from T-Mobile's point of view is that their loan program exploits "present bias" even more than conventional plans do. The proposition for consumers is: "Pay $99 now and the rest later."
More importantly, though, I would like to destroy the absurd notion that subsidies exist anywhere in the industry. There are no subsidies. Subsidies are a myth.
The truth is that what carriers call "subsidies" are really very bad, very high-interest loans buried inside a shell game designed to confuse the public into spending far more for phones and wireless service than they really should.