Apple is now letting you lease an iPhone like a car. Here's what to know.

By Julian Torres

The program represents a historic shift in how the company sells its consumer electronics - with consumers increasingly worried about high prices

Apple says iPhone lease options will be as low as $17.99 per month.

As Apple gears up for expected iPhone price hikes, the company is rolling out a new payment option that will let its U.S. users lease devices similarly to the way they might finance a car.

While the company already offers traditional installment plans, the newly announced Apple Upgrade program is different because customers will be paying for ongoing access to products rather than paying to own. At term's end, customers can upgrade to a newer device, buy their current device outright or return it to Apple (AAPL).

The announcement comes nearly a month after the tech giant raised prices on its MacBook and iPad lines by hundreds of dollars, citing memory-chip shortages and other rising hardware costs. Wall Street expects the company to lift iPhone prices when it introduces its next lineup in the fall.

To offset the sticker shock of rising prices, the rollout of a financing model is the biggest way Apple can make it easier for customers to purchase its phones, Ivan Feinseth, chief investment officer and director of research at Tigress Financial Partners, told MarketWatch in an email ahead of the official announcement.

"Reframing a $1,200 purchase as [an approximately] $40/month lease pulls forward real incremental demand from buyers who wanted to upgrade but balked at the lump sum," Feinseth said. Bloomberg News had reported last week on the program's anticipated launch.

The company said in a release that lease options "start as low as $17.99 per month" for the iPhone.

Apple's new leasing program is done in partnership with popular buy-now-pay-later platform Klarna Group (KLAR) and covers the iPhone, iPad, Mac and Apple Watch. It represents one of the biggest changes in the company's history in how Apple sells its consumer electronics.

The iPhone and Apple Watch will be offered on 12- and 24-month terms, while the iPad and Mac will be on 24- and 36-month terms. In the U.S., the company is winding down its existing iPhone Payments and iPhone Upgrade Program in place of the new Apple Upgrade initiative, which notably does not include AppleCare insurance.

A win-win

Wall Street sees the partnership as a win for both Apple and Klarna. Apple can capture the lift in sales from lower-friction financing while pushing credit risk to Klarna, Feinseth said.

Since Apple Upgrade gets leasing customers to return every 12 to 36 months when their contracts end, Apple can time upgrade offers for when consumers are most likely to come back for a new device - something that traditional cash sales or installment plans couldn't as easily track. Because lease customers are locked into the Apple ecosystem for the duration of their agreement, they could be incentivized to buy AppleCare insurance from the company.

The leasing option could also benefit Apple's refurbishing program, Feinseth said. Mobile carriers and third-party resellers have built lucrative businesses around used-iPhone sales, but Apple can now capture more of that activity, since devices returned at lease-end will feed into Apple's own Certified Refurbished and trade-in channels.

As for Klarna, becoming Apple's financing backer means netting a premier partnership that can offer large volumes of recurring business as the BNPL company continues to scale. An agreement with Apple may offer higher-margin financing agreements that further push the company toward sustained profitability.

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The risks

Apple Upgrade gives the tech giant a new way to capture revenue streams, but it also poses new logistical and reputational challenges, Feinseth said.

Apple will have to streamline its process for reclaiming leased hardware and be prepared to refurbish devices at scale once customers return them, Feinseth said. Because AppleCare won't be bundled into the new upgrade program, the company will likely also have to manage a spike in disputes over excess wear, which could create friction with customers who believe they've been unjustly charged for the condition of leased products.

Meanwhile, Klarna will be deviating from its traditional pay-in-four system that stretches a purchase over six weeks. The year-plus leases for hardware will be far longer and more expensive than those typically part of Klarna's playbook, and longer-term BNPL loans generally carry a higher chance that the company loses money over a customer's failure to repay, Feinseth explained.

Both companies are entering this partnership as regulators shift away from a largely hands-off approach to BNPL and leasing programs, according to Feinseth. Now the Consumer Financial Protection Bureau, individual states and international bodies are taking a more active look at these sorts of loans, which means compliance costs and disclosure obligations could rise steadily over the multiyear life of these leases, he added.

What about consumers?

Experts recommend thinking carefully about whether it makes sense to lease an Apple product. While the Apple Upgrade option only requires a "soft" credit pull, consumers should approach this choice as they would in evaluating whether any leased asset fits into their financial lives.

Joon Um, a certified financial planner with Secure Tax & Account Inc., told MarketWatch that technology hardware quickly loses value, and those considering a lease should understand that they're paying for a program that comes with less flexibility to update, sell or end the contract early.

"If you upgrade every 1-2 years, it can make sense. If you keep your devices for several years, buying is usually the cheaper option," Um said.

Since you aren't building ownership in the asset that you are leasing, your agreement comes with fundamentally different protections and fees. For instance, if you decide you no longer want your device, it wouldn't be as simple as returning it to Apple for free.

"You may incur substantial fees if you terminate your lease before the end of your initial lease term," Apple said in its press release.

Damaging your leased hardware may also carry unforeseen expenses. Even if you get it repaired, the condition you return it in has to meet Apple's expectations for its products. "Insurance is not included in your lease, and you may incur damage fees if the device is lost, stolen, or not returned in the condition required by the lease," Apple noted.

Um recommended comparing the total expected cost of your lease instead of the monthly payment, since additional fees can quickly outweigh the savings a lease initially seems to offer.

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-Julian Torres

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