Why would anyone sign a long-term contract?

June 17 2007 by Ellen Roseman

This is one of the questions readers ask, especially when I write about the messes people get into trying to break their contracts. Life is uncertain, things change, why tie yourself down? You have to pay big bucks to buy your freedom, if the company agrees to let you out of the contract at all.

I know why people sign long-term contracts for cell phones. They get great incentives, such as a free or discounted phone and lower monthly rates. Same with Internet service providers, who also try to lock in subscribers with enticing deals.

But with cell phones and Internet service, your contract may not protect you from price increases. Read the terms and you’ll see most companies can still pass along increases on a regular basis. So what’s the point?

That brings me to natural gas and electricity contracts, which do protect you from future price increases. That’s their attraction to homeowners and renters. But the premium you pay for security can be mighty high.

Take natural gas prices, which spiked in price a few years ago. Those who signed early did save money. (I had a gas contract and I saved money.) However, you don’t know whether you’ll save or not. It’s a gamble. And in the last 18 months, people who signed gas contracts have lost money. Some are paying double the current market rate. (Thankfully, I didn’t resign.)

Electricity, too, carries a much higher price in contracts than if you stay with your utility and pay the current market rate. Since the price is still partially controlled by the Ontario government, there’s no reason to sign at this point, in my view.

When it comes to personal finance and investing, there are lot of questions that fall into the “why would anyone” category. Here are a few of mine and I’d like to hear some of yours.

–Why would anyone pay bank fees instead of moving their business to a no-fee bank or a customer-friendly credit union?

–Why would anyone buy mutual funds with high management expense ratios when there are lots of low-cost options?

–Why would anyone buy life insurance as an investment instead of buying a no-frills term life policy?

15 comments

  1. FourPillars

    Jun 17 2007

    Why would anyone get a mortgage at the posted rate?

  2. A Dawn

    Jun 17 2007

    Why would anyone pay a lot more at Dominion or Loblaws instead of going to No Frills?
    A Dawn
    http://adawn.net
    http://adawn.squarespace.com

  3. FourPillars

    Jun 18 2007

    Because the Loblaws is a five minute walk vs 20 minute walk for No-Frills.

  4. A Dawn

    Jun 19 2007

    FourPillars, you have a valid point but this is not always the case. In my neighborhood (southeast Scarborough), at one location, Price Chopper and Loblaws, and at another location, No Frills and Dominion are located face to face. $100 worth of groceries at Dominion or Loblaws would cost $65 to $70 at Nof Frills or Price Chopper. Does it mean that people going to Loblaws or Dominion are all rich? Not really. I have interviewed some of these shoppers and some of them actually live paycheck to paycheck and they would walk 20 minutes to go to a Loblaws vs. a 2 minute walk for No Frills. Why would they do it? This is going to be one of the issues I will be discussing in my second book, which is expected to be published in 2009. My first book is coming out by the end of this year. By the way, I visited your website. Its simple layout is really cool. Cheers.

  5. Andy

    Jun 19 2007

    In the case of a long term cell phone deal or a long distance deal, the phone company is responding to competition. I have a deal with Bell for a lot of minutes (that I never use) per month for $5, 24/7 in Canada and the US. It’s fine since we are in Toronto and our children and friends are in the prairies and BC. Since I have this, I get $5 off my Sympatico account and maybe $5 off my cell phone account. I don’t know how long I signed up for, but I figure that if Rogers or Telus provides a better offer, Bell will match it. So, long term, smong term … the long term isn’t worth the paper it isn’t written on. It’s a gimmick. I’m happy!

  6. FourPillars

    Jun 19 2007

    Thanks A Dawn – I’ll check out your site as well.

    To be honest the Loblaws we go to is across the street from a Price Choppers which I guess is the same as No-Frills. I’ve been bugging my wife to try Price Choppers but the way the parking lot is set up it’s a lot harder to negotiate with a baby stroller so she prefers Loblaws. I’d like to see someone (other than myself) do a proper price comparison of the two and see how much difference it makes.

    Mike

  7. FourPillars

    Jun 20 2007

    Those marketers are crooks when they sell the contracts door to door. Last summer I almost got sucked in by this jerk who kept ringing the doorbell even though my wife & newborn were asleep in the living room (I was out back). He asked me if I had gotten my “discount” on my gas bill – I thought he was from Enbridge and actually went to look for an old bill (they need one to switch u over). It was only after asking repeatedly if he was from Enbridge (he wouldn’t say who he worked for) I finally figured out he was a marketer. On his clipboard he had quite a few bills from my neighbours, so I’ll bet some of them signed up not knowing what they were doing. Normally I’m sharp enough to see through those guys but when you have a week-old baby you lose your edge a bit 🙂

    Mike

  8. A Dawn

    Jun 22 2007

    FourPillars, This is regarding your Jun 20 2007 post – My comment,”Could not have said it better.”
    A Dawn
    http://adawn.net
    http://adawn.squarespace.com

  9. z

    Jul 10 2007

    My friend is under 18 and someone got him to sign a gas contract while his parents were at work. Is that legal?

  10. Ellen Roseman

    Jul 10 2007

    This is my response to the question above from Z:

    Yes, it’s true that door-to-door sales of gas contracts are made to minors. But the contract can’t be enforced unless an adult in the household agrees to it.

    Under Ontario Energy Board rules, the gas marketer has to call back within a specific period after a contract is signed and reaffirm it. This means asking questions to see if the person understands what’s involved and wants to go ahead with the transaction.

    So, if your young friend agreed to something that the parents don’t like, they can cancel the contract without penalty. The phone conversation has to be recorded and played back to the conmsumer at a later date, if requested.

    I wish gas marketers asked children their age (and got an ID) before letting them sign deals. I also wish they tried to sell contracts in other ways than putting presssure on people at their doors. It’s too easy for consumers to get confused and not realize what they’re doing. They may sign just to get rid of that obnoxious salesman interrupting their dinner.

  11. ed

    Dec 13 2007

    You know, gas and electricity marketers are just trying to pay their own bills. Actually you know what, they wait in front of your house all day, waiting for you to sit down for supper and then BANG – ding dong! No, that’s not how it works.

    It depends on if you believe in the programs or not. Gas and electricity rates have historically increased dramatically. Ontarians haven’t noticed the electricity because of government subsidies. However, gas has doubled… What – is it not going to go up anymore? It’s going to decrease over the next five years?

    High premiums are a bummer, sure. But in the long run, realistically I can’t see my paying 10 cents per cubic metre on my gas again, or 50 cents at the pumps. The majority of people live in homes for 25 years, they don’t like change. Sure, there are the odd couples…the reality of marketers tracking these people down, especially if they move to a foreign country…slim to none. Most contracts are transferable anyway.

  12. Becky

    Jan 27 2008

    I have just arrived home from shopping at Price Choppers for my second time and will not be returning (except to get a refund on the two reusable bags I purchased).

    At the checkout, my bag began to beep and the store person in charge (who was already irritated because she had to wait and swipe a First Nations card for the couple behind me) became very hostile and asked me if I had bought any meat. She then proceeded to pull everything out of my bag (as I stood thinking what other meat did I buy). It was not the meat, but the cheese apparently had not been coded properly!!

    I asked if this was an ongoing occurrence and she told me “we have security for a reason.” I informed her not because of me and that it would be my last visit, to which she most insincerely retorted, “sorry for any inconvenience!” My reaction? Good service is worth more to me than abuse.

  13. Pat

    Mar 5 2010

    Your statement, “electricity, too, carries a much higher price in contracts than if you stay with your utility and pay current . . . ” doesn’t carry much weight now that Smart Meters will allow PowerStream and others to charge 8.8 cents and 9.4 cents per kWh during the hours of 7 a.m. to 9 p.m.

    Planet Energy is offering a 5 year contract for 5.3 cents fixed and 4.7 cents variable per kWh.

    Not sure about anyone else, but I don’t want to do my laundry at 10 p.m., and I can’t run my retail business after 9 p.m. SO I WILL SAVE.