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You'll be paying for it through your AT&T bill. You'll sign a new contract that will add the NEXT payments to your existing bill. You can also make a down payment to reduce the monthly payment, if you want to. At the time of purchase, the only thing you'll have to pay for is the taxes, and any accessories that you buy to go with it (plus any down payment if you decide to put some money down to reduce your monthly payments). Your next monthly bill will include your first monthly installment, plus an upgrade fee, and possibly a proration charge or credit.
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