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When Paying a $200 Early Termination Fee Makes Sense

by Ryan Guina

My wife and I recently relocated to another state, which, if you haven’t done it, is a lot of work! One of the least fun aspects of moving is comparing utility companies. It’s often difficult to track down the best deals when you aren’t familiar with the local companies.

One of the most important services for us to nail down was an internet provider, since I do much of my work online. We moved to a rural area and there is only one company in our subdivision that provides cable internet service, though there are several which provide DSL service.

However, my wife I don’t use a landline – we only use cell phones. In addition, DSL isn’t fast enough for our needs – we do a lot of work online and we stream TV on our computers since we recently canceled cable and sold our TVs. No phone and no cable TV means also means we can’t save money with a bundled package.

So basically there was only one company in our subdivision that offered the service we needed. At first it seemed like they had us over a barrel. First, a little more background, then the pricing structure…

My wife and I needed a short term arrangement for our internet service – we are planning on buying a home, but we decided to rent a place for a few months while we look. In my opinion, it is usually better to rent first when you relocate because it gives you more time to find the house you are looking for. So we entered into a 3 month lease with a month to month option, giving us some breathing room to make the move and buy a house at our own pace.

Unfortunately, the best deals are for people who are willing to lock into a long term agreement. It makes sense for the service providers to offer these kinds of deals, especially when coupled with an early termination fee. Cable and internet providers, satellite TV providers, cell phones, and similar services are well known for this tactic – hook customers with a low introductory rate, then give them an early termination fee in the contract as an incentive not to leave.

When paying an early termination fee is worth it

My wife and I weren’t sure how long we could lock ourselves into a contract, since we only have a short term lease and didn’t want a long commitment or early termination fee hanging over us.

So after ascertaining there was only one option available to us, I ran the numbers for the installation fees, monthly service charge, and the early termination fee to determine the break even point.

Here were my options (12 Mbps):

  • $63/month without a contract. $60 installation.
  • $55/month with a 12 month contract ($120 early termination fee, prorated $30 every 3 months). $30 installation.
  • $20/month for the first 12 months, then $35 a month for the next 12 months with a 24 month contract ($240 early termination fee, prorated $30 every 3 months). $20 installation.

The numbers, including the installation fee, monthly service and prorated early termination fees came out looking like this (no contract, 12 month contract, 24 month contract):

  • Month 1: $123     $205     $280
  • Month 2: $186     $260     $300
  • Month 3: $249     $285     $320
  • Month 4: $312     $340     $310
  • Month 5: $375     $395     $330
  • Month 6: $438     $420     $350
  • Month 7: $501     $475     $340
  • Month 8: $564     $530     $360
  • Month 9: $627     $555     $380
  • Month 10: $690     $610     $370
  • Month 11: $753     $665     $390
  • Month 12: $816     $690     $410

The numbers were surprising. As you can see, the break even point for the 12 month contract is the 6 month point, but it’s only $20 more to beak the contract at the 5 month mark. I was all set to go with this contract until I ran the numbers on the offer that came with a 24 month contract.

Running the numbers shows me that I only need to keep the service for 4 months before breaking even. Then the savings add up quickly – and substantially. In fact, it is cheaper to cancel in month 4 than 3, and in month 7 compared to month 6, etc. because the prorated early termination fee drops $30 every 3 months, and the service is only $20 per month for the first 12 months.

My wife and I will be in our short term lease for at least 3, and even if we leave right at the 3 month mark, I will simply pay for a month of service without using it, then cancel and pay the early termination fee.

The psychology of early termination fees

I’m sure the company ran the numbers and they know when they will and will not break even. But my guess is that most people won’t actually run the numbers and most people won’t choose the plan that has the higher early termination fee if they are in a similar situation as my wife and I (they aren’t sure if they can commit to a long term contract). And I can certainly understand that – many people hate paying anything that has the word “fee” attached to it.

I asked the phone rep about this and he mentioned that he has tried to explain the pricing structure to many people in the past, but the majority of new customers choose the 12 month contract because they are afraid of the commitment and $240 early termination fee.

Overall, I think the 24 month plan and high early termination fee must work well for the company – they get a long term customer, they can lock in their rate and create earnings projections, they get an early termination fee when people leave early, and as a side effect (whether planned or not) they probably scare a lot of people into choosing a more expensive monthly plan because they are afraid of the early termination fees.

As for me, I’ll happily pay the early termination fee – as long as it is after the 4 month break even point!


Published or updated February 20, 2011.
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{ 8 comments… read them below or add one }

1 krantcents

Good job! More people should analyze the offerings before making a decision. This applies to everything we do.

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2 Ryan

The customer service rep I spoke with said he tried to explain this to a potential customer and she hang up on him when he started going over the math. I guess some people get caught up on the terminology or some other aspect of the offers.

In any case, it is always worth running the numbers to see which situation is the best for you!

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3 Donny Gamble

I think that it make sense when you can get a better rate with another company that will save you money over the course of the year

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4 HedgeHoncho

I almost will never take the early termination fee route based on principle.

Usually, even if you find savings to be financially beneficial, they are not worth it in the long run for me to worry about marginal differences.

But, that’s just me doin me.

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5 Ryan

I’m not too concerned about a marginal difference either – but it makes sense to run the numbers to be sure which deal is the best. It took 15 minutes to run the numbers, and in this case, every month after month 4 saves me $35-$43 per month for the first 8 months, then $18-$23 per month for the next 12 months. That’s several hundred dollars, which in my book, isn’t a marginal difference. A couple bucks, I could care less. A couple hundred, and you have my attention.

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6 Misfitz

the other thing to remember is when they renegotiate that fee every time you upgrade your phone or something. is the value of the phone worth breaking out of the contract early?

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7 Sun

Thanks for the analysis. I got $30 on time Warner when Att had their uverse special, but maybe I can negotiate something better :).

Don’t some credit cards give you 5% rewards when you pay utilities?

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8 NewsJunkie

I haven’t had to deal with cancellations fees for cable or internet ever (although we were in a similar situation for a short term rental but got the cheapest internet after some pushing from the customer service rep for higher speed), but we recently canceled our cell phone contracts and that was a surprisingly painless experience once we did the math as well. Most people are afraid of their wireless company and switching would be a scary endeavor. We priced out prepaid phones with no contract and we save about $100 a month between the two of us, so after about 2 months we broke even with our termination fees. I would really recommend going with prepaid instead of being in a contract and paying much more than you need to. I originally thought that’s what your article was about when I went to read it.

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