There are lots of benefits to using an unlocked iPhone: using it with a prepaid plan will save you money, you can take your phone to a different carrier at any time, or maybe you want to replace your current phone but your contract isn't up yet. Apple makes it somewhat straightforward to buy an unlocked iPhone from them, but there are lots of details you should consider before you do.
There are multiple different versions of the iPhone 5s and 5c, make sure you buy the correct one
There are actually 3 different versions each of the iPhone 5s and 5c that support different carriers and radio frequencies around the world. The iPhone 5s Model A1533 (GSM) supports US GSM carriers AT&T and T-Mobile and prepaid carriers that run on those networks (Straight Talk, Net 10, and Cricket). Model A1533 (CDMA) supports Verizon. Model A1453 supports Sprint, Virgin, US Cellular, C-Spire, and others. The same goes for the 3 different versions of the iPhone 5c. See more details about the different versions and all the carriers they support here.
Now for some fine print. The Verizon models of the iPhone (A1533 CDMA for 5s and A1532 CDMA for 5c) will also work on GSM carriers such as AT&T, T-Mobile, and prepaid GSM carriers. Furthermore, due to an agreement made with the FCC all Verizon LTE phones are sold unlocked, whether they're purchased at full price or on a contract. So, if you'd like the ability to switch between Verizon and GSM carriers or you'd like to use a Verizon tablet data plan in your phone you may prefer to buy the Verizon version of the unlocked iPhone. You may also be able to get a higher price for the phone when you eventually sell it, since you'll be able to sell it to both Verizon and AT&T users.
Where to buy an unlocked iPhone and what you'll pay
There are several places to buy an unlocked iPhone. Prices are pretty consistent across retailers and sales are somewhat rare, especially for the unlocked models. A contract-free iPhone 5s starts at $650 while the 5c starts at $550, and you'll pay $100 extra for each additional 16GB of storage with either model. This may sound like a lot, but with a prepaid plan you'll end up saving money over a two-year period.
You can purchase the GSM version directly from Apple's website. I'd recommend getting it with the SIM card even if you don't plan to use it on T-Mobile because if you eventually do switch to them you'll save yourself $10 on the SIM. The unlocked GSM version can also be bought in an Apple retail store.
If you want to purchase the Verizon version you can buy it 'contract-free' (to avoid confusion don't say 'unlocked') from an Apple store or Verizon retail store. You can also buy it online from Verizon, but you'll have to link it to a new or existing account.
An unlocked iPhone can also be purchased new or used from Amazon or sellers on eBay and Craigslist and other sites. If you go this route make sure you're purchasing the model you need (see previous section) and that the phone truly is unlocked. There's nothing wrong with buying a used GSM iPhone that was previously locked to AT&T and is now unlocked, but don't simply take the seller's word for it unless they're trustworthy.
If you're looking for a phone to use on Sprint, Virgin, or other smaller CDMA carriers it may be hard to find an unlocked version outside of eBay. Typically these phones are only sold directly from the carriers.
Choosing a plan and setting up your new unlocked iPhone
Unless you want a really expensive iPod Touch, you're going to need a wireless plan to use with your unlocked iPhone. There are lots of great prepaid plans, see our overview of all the best available. Some of these plans will give you a SIM card that you can activate online and insert into the phone. The iPhone 5, 5c, and 5s all use the small nano sized SIM. Some carriers may only offer a micro SIM, but you can cut a SIM down yourself or buy a SIM cutter online. I recently cut down a micro SIM for my iPad and it wasn't too difficult with a sharp knife and metal file using an existing nano SIM as a guide.
Online activation is usually pretty simple. You may need to enter the ICCID number from the SIM card and your iPhone's IMEI number. To get your IMEI number go into Settings-General-About and scroll down to IMEI. You'll also be able to view the SIM's ICCID number here if it's already been inserted into the phone.
When you're going through the account activation you will likely be asked whether you want a new number or want to port over an existing number. If you port your existing number over it will cancel your old contract and you may be subject to an early termination fee.
I've used T-Mobile's $30 prepaid plan and liked it a lot, but it doesn't have sufficient coverage where I'm currently living. If you're feeling slightly adventurous you can also use a tablet data plan in your iPhone and use free apps to text and make calls.
Wrap-up
There are lots of great reasons to buy an unlocked iPhone instead of a carrier-locked model. I enjoy the freedom of using an unlocked phone to try out different prepaid carriers and am able to switch at will. I can also easily cancel service for a month or two if I won't need it. Some say you can't put a price on freedom, but in this case you can - and it will cost a lot less than buying an iPhone with a two-year contract will.