For years, flip phones, stick phones and lower-end smartphones ? not iPhones and other top-of-the-line models ? were Gary Fuentes? bestsellers.
His family?s La Fiesta Wireless prepaid-phone shop in El Monte tried selling pricey models like the Samsung Galaxy S3, which came out in 2012 and retailed for more than $400, but the shop?s working-class customers weren?t interested.
?We would probably stock no more than five or 10 of the expensive phones,? he said. ?Customers were focused more on the $100 phones, the $150 phones.?
The highest-end smartphones haven?t gotten cheaper ? if anything they are more expensive ? but Fuentes is now seeing many more customers willing to shell out for the latest iPhones and Samsung?s flagship Galaxy S7. They?re just not doing so all at once.
A growing number of prepaid phone users are financing their phones, choosing rent-to-own plans that enable them to pay over several months or a year. That?s relatively new in the prepaid market, where customers have generally bought phones outright and where inexpensive phones still dominate.
Big-name phone carriers such as Verizon and AT&T will sell customers a phone and let them pay for it over a few years, usually without any interest or markup over the retail price. Such deals, though, are available only to customers with decent credit who sign up for a standard monthly service plan.
But these new payment plans, aimed at customers with bad credit or no credit, come at a cost. Spreading out payments can mean paying more than $1,500 over the course of a year for an iPhone 6 Plus that retails for $750.
Though the plans technically aren?t loans, payments at leasing companies with pricier terms can be the equivalent of borrowing at interest rates topping 200 percent.
?Some customers come back and say they did the math and realized this was kind of expensive. They realize they could have bought two phones for that,? Fuentes said.
Since the plans are structured as leases, customers can return the phones, typically after a minimum rental period of a few months, and be off the hook for the remaining payments. Still, consumer advocates warn that these plans, similar to rent-to-own arrangements used to buy furniture and appliances, encourage customers to get things they really can?t afford.
?Is it a good idea for consumers to get a phone when they end up paying 100 percent interest for it? I wouldn?t do it,? said Ed Mierzwinski, consumer program director at U.S. Public Interest Research Group. ?Rent-to-own companies make the promise of the American dream ? that you can own anything ? but the price is high.?
Most prepaid customers ? about 86 percent ? now have smartphones, according to research firm NPD Group. But the vast majority of those phones are models that cost $150 or less, according to consulting firm IDC Research. That includes lower-priced phones from LG, Samsung, ZTE, Huawei and Kyocera.
But leasing firms Payjoy and SmartPay Leasing, both based in the San Francisco area, say most of their customers are using payment plans to buy high-end phones, including the latest iPhones and Samsungs.
Ken Pedotto, executive vice president of San Francisco?s SmartPay, which has been leasing phones since 2012 and was acquired last year by New Hampshire firm Tempoe, said the company leases more than 100,000 phones a year, and about two-thirds of those are phones that cost $450 or more.
SmartPay, Payjoy and other leasing firms, including market leader Progressive Leasing, which is owned by rent-to-own Atlanta furniture giant Aaron?s, work directly with prepaid phone carriers and bricks-and-mortar prepaid phone shops.
Customers pick the phone they want, go through a brief online credit check, make a down payment of about 20 percent and walk out, phone in hand. Then the monthly payments start.
SmartPay gives a snapshot of a typical deal on its website. For a phone that retails for $199, a customer can pay $29.85 upfront, and will then pay $37 each month for the next 11 months. That?s a total cost of about $437 ? more than twice the phone?s retail price.
Customers can pay less, depending on their credit and the terms of their lease, and they have the option to buy the phone outright before the end of the lease, which can also cut the total cost.
Pedotto acknowledged that these rent-to-own plans are pricey, but said that?s because they are geared toward risky consumers ? ones who have little credit history, and many of whom will at some point simply stop paying.
?Our goal is to offer the lowest price possible that we can stay in business with,? he said. ?But if you have a high-risk customer and you?re giving them a (low) lease multiple, you?re going to be out of business. Some will pay us for a while, then we?ll lose touch and we?ll never be able to contact them.?
He said SmartPay is trying to offer lower rates by working with prepaid carriers to bundle lease and service payments together. If customers pay for their phone and service separately, they can simply stop paying for the phone while continuing with their service plan. By connecting the two, SmartPay hopes more customers will keep paying, leading to lower rates.
?If they stop paying, they lose phone service, too,? he said. ?It gives us better repayments.?