My Thoughts in Favor of Financing

[Greysword]

Hi everyone,

I came across a few replies on two recent posts that brought up the idea financing a DVC contract is universally a poor financial decision, and I was hoping to provide my thoughts and hear yours on the topic.

Post1: http://www.disboards.com/showthread.php?t=2324746

Post2: http://www.disboards.com/showthread.php?t=2316265

Purchasing DVC through Disney with 10% interest simply extends the break even point, but does not totally negate it, even with discounts against rack rates. If our calculations account for the full cost of interest with the initial price, then a sensible decision can be made about the feasibility and afforability of the product. For our family, it was sensible given our vacation habits, desire for ammenities, and the probablility we would spend this much at Disney regardless of whether the costs were consolidated or ammortized.

On another point, the idea that I can afford $2,500 per year for the next 20-50 years to stay at a deluxe resort is touted as sensible, but affording $2,040 per year for the next 10 years ($170/month for our 165 SSR points) is poor financial management does not make sense to me. Although DVC, as a prepaid vacation, is considered a luxury item, our financial situation permits this sort of splurge, and we are happy to pay a premium (in the form of interest) to use our vacation points earlier than later (time it would take to save to purchase outright). The vacations we already had due to this were invaluable (financially) to us. In addition, our family (and likely many other people) are happy to finance many luxury items we do not need, such as more car than the family absolutely needs, a bigger house in a great neighborhood, jewelry, and other such items. People finance Christmas gifts and other vacations all the time, which can also be considered luxury. Why is a preplanned vacation any different?

Finally, I think it depends on a person's personal preference on whether the cost of financing is viable or not. My personal sentiment is that money is simply a tool to be used to acquire the things that make our lives easier and happier. For me serving in the military for two conflicts, I understand mortality is moving target. Thus, I have determined that while planning for retirement and hedging against downturns in the economy are very important, other things are just as (or sometimes moreso) important. I want to use my resources to their most effective value now, so I don't have many regrets if my friends or family leave the Earth prematurely and they don't have regrets if I am called to another place.

By financing DVC, I am able to provide my family with fun vacations now that have created wonderful memories. In addition, this decision ensures my family will continue to have these same vacation opportunities once the loan is paid off in another five years, regardless of whether I can share with them or not or if our financial situation changes for the worst.

That is my perspective on the topic, and I welcome you to share your thoughts on this, as I respect your input! Thanks for listening.

- Chris

 

[Sandisw]

I look at things the same way as you and when deciding to buy DVC, did consider the financing option (ended up not needing to do it, but wouldn't have had any problems doing it).

We were going to continue to pay for our yearly trips, whether or not we bought DVC. My typical trips to WDW over the past 5 years were averaging about $5000 - $6000 for my family of five (room, airfare, food, spending, tickets, and car rental). Since I was going to continue to spend this to go, I use these yearly figures to decide whether or not DVC would work.

As long as I was able to still visit for no more than this, and get a better room, then DVC was for me. To me, whether I took the cash and spent it on the hotel rooms or spent it on finance charges, didn't matter. My vacation money was there to use for vacation (and if we didn't spend it at WDW, we spent it on other fun stuff).

So, while I do agree that the cost of financing needs to be considered and that buying for cash certainly makes it less costly to own DVC, I think that the memories and such are just as worth it.

 

[SSR]

Very thoughtful topic and analysis. :

But, I disagree with your premise. Putting aside the emotional/intangible aspect of owning/going to Disney (on which I concede is important for many folks), it's a generally accepted and virtually universal fact that financing a depreciating asset (at 10%+) isn't a great financial move. It's really that simple. We can slice and dice it any way we want, and justify it any way we want, but if you don't have the $15,000 - $20,000 to put down, you can't "afford" it in my own humble opinion and view of the financial world.

(One other point you didn't mention, but which I'll also concede, is the lost opportunity costs on my $16,000 purchase. I'm earning nothing on my money right now it seems, but in "normal" times, I can make 8% on my money. So, I actually end up "losing" the opportunity to use that $16,000 to theoretically make more money. I think the lost opportunity factors are the strongest rebuttal to the "Don't Finance Club." So, in reality, the spread really isn't 10%. It's probably more like 3-5% extra you're paying to finance.)

That all being said, after burying a 47 year old family member and 45 year old dear friend this week, I'm moving heavily toward the "Do Whatever Makes You and Your Family Happy Camp."

 

[SSR]

Oops, one more thing:

In addition, our family (and likely many other people) are happy to finance many luxury items we do not need, such as more car than the family absolutely needs, a bigger house in a great neighborhood, jewelry, and other such items. People finance Christmas gifts and other vacations all the time, which can also be considered luxury. Why is a preplanned vacation any different?

It's not different. That's my point, I think.

 

[bumbershoot]

I agree, Chris.

We were going to continue to pay for our yearly trips, whether or not we bought DVC.

EXACTLY. Say what you will about what you could be doing with the interest, that it's a depreciating etc etc...putting money towards something like this makes MUCH more sense than renting hotel rooms. And we would have been doing that anyway, that money would be going out anyway. It makes MORE sense for us to do it this way (and it will be done in about 2.5 years vs the 10 years official maturity date, if all continues as it's been going, knock wood) than to take the vacations we were taking while also saving up. Knowing how much it increased since we first sat in our meeting in Sept '07 (and our guide had the info right at his fingertips, clever man), it's very likely things would have been far more expensive once we'd saved it all up.


I don't look at DVC as any sort of investment. And honestly, I wouldn't have been doing anything with that 10% anyway, we just aren't that sort of investor at this time...so those things are entirely moot for us.

Of course, this and our car (which was an emergency purchase when hubby's entirely paid for car suddenly died spectacularly) are the only things we finance. No CC debt, etc...if we had other consumer debt we probably wouldn't have done it...

 

[crisi]

I think financing luxuries is one I'm not comfortable with. The thing is that if you pay $2500 a year to stay in a Deluxe resort and you loose your job/have medical bills/ get divorced, you can downgrade your expectations or skip a few years. With DVC, you still need to pay the bill even when times are tough. And if those tough times come very soon after purchase, you'll very likely sell at a significant loss when you can least afford it. Saw a LOT of that last Winter and Spring around here. Its a risk, and a risk you pay to take.

If you are financing because you'd rather take the capital gains on your large stock portfolio next year, or your deferred compensation plan has a payout two years from now, or your grandmothers $3M will just went into escrow and will take a year or two to clear but you have been notifed you'll be getting $500k when its cleared....that's financing as financial planning.

We don't finance cars, vacations, jewelry, or Christmas gifts. Our house is paid off and rather than moving into more than we need, we are content to live in the one we have.

 

[ohtarabell]

Chris:

I think the issue is that others are viewing this from a strictly financial perspective and you are bringing in the emotional aspects of the decision. Put another way, should you pay off your mortgage or not? If you have the funds and can borrow at 4.75%, equating to 3% after taxes, then get 3.5% on muni bonds, it makes no financial sense to pay it off. If however, the piece of mind is worth 50 basis points to you, then it isn't a bad decision.

I see this the same way. If the ability to vacation now is worth more than the interest you pay and it ends up being cheaper than waiting, then go for it. An earlier post references the future, and you state that you are a veteran of two conflicts. Certainly, you have a different perspective on the future than many of us would. There is no reason to discount your perspective of the future.

One of the things I have tried to teach my daughters is to use money to by experiences instead of posessions. Family vacations are irreplaceable experiences. If I had it to do all over again, I would have bought and financed DVC rather than waiting 10 years to buy it in cash.

 

[Nikisha421]

Thanks OP for adding a lil positive light to the situation...I know that everytime some asks or says anything about financing its a big deal or problem...I know that I learned very quickly to keep my finanical business to myself on the boards...one of my original post was about financing and my personal situation...and I think I was flamed for about 5 long pages...the only advice I that I as given that was most positive was sent in a PM....becuase that is how things are done on the DISboards...though that person helped me to come closer to a decision...i have no problem financing my purchase its not bothering me...could i be using that money for something else...PROBABLY...but I have decided to finance a DVC purchase instead...GREAT POINTS

 

[MrShiny]

It really depends on the other uses of the money. Remember, in most cases the interest is tax-deductible, which can reduce the real cost of financing after you figure in how much it reduces your tax liability (I've heard 2% is a fair rule of thumb - so 10% becomes 8%). Now if you can get a home equity loan (increasingly difficult these days!) that's better, as the rate will generally be less and still usually be tax deductible.

But of course that puts your home slightly more at risk.

It all comes down to how valuable the money is to you now. The best would be to save and pay it all off before you buy, but you'll probably pay a higher price and of course won't enjoy the benefits of membership while you are saving.

 

[hopare]

Thank you for posting this, I agree with the op.

 

[Rlbren]

We have 2 DVC contacts financed through Disney and have no reservations about our decision. Hopefully we will pay them off early, but if not, I will not lose sleep over it. To each his own...live and let live....life is to short...and all that jazz.... I would never presume to know someones financial life and frankly I don't want to know. I have enough pulling my own little red wagon....if I waited to pay cash for DVC, I would still be waiting....life is not a dress rehearsal...

As long as your bills and financial obligations are being paid...what's the big deal

 

[ssawka]

...it's a generally accepted and virtually universal fact that financing a depreciating asset (at 10%+) isn't a great financial move.

Are you against financing cars too? Real estate is about the only asset that typically gets financed and increases in value.

The best would be to save and pay it all off before you buy, but you'll probably pay a higher price and of course won't enjoy the benefits of membership while you are saving.

Exactly, we financed a purchase of 275 BLT points in June, following the webcast, for $92 a point. Right now, those points would be over $100 a point. That's about a 10% increase, so essentially that pays for the first year of interest. So, since we will have the loan payed off in a few years, we will probably be paying about 8% (10% - 2% tax estimate) for a couple years and be able to enjoy vacations now. It could be argued that we could have saved more by buying resale at another resort, but that's not what we wanted. we (I) wanted BLT!

 

[SSR]

Are you against financing cars too? Real estate is about the only asset that typically gets financed and increases in value.

Yes. Until my most recent purchase, I've never purchased a new car (usually 1-2 year old lease turn-ins after someone else takes the 30% depreciation hit) and usually drive them until they're no longer drivable. I paid cash for them. With my current vehicle, I bought it in October, 2001 at 0% interest when they were giving cars away (post 9/11). If it wasn't for the 0% interest, I would have paid cash. Instead, I took that cash and bought things when other people were selling them (investments). I "splurged" by getting a new car instead of a used one, but that's the last time I'll do that. Of course, this is my own personal opinion and I recognize that it may be wrong.

 

[nunzia]

I agree with everything you said, and my views are very similar. We took vacations we couldn't afford when the kids were little..even had a nearly exact replica of Griswold station wagon...and do not regret one penny. A special class we could not afford for our eldest son in WDW cemented his desire to be an artist and that is how he now makes his living.
It is a balancing act for sure..we are closer to retirement than I'd like financially, but I also refuse to put every dime toward that..it is important to do things now as well as hopefully later. You never know what's coming, and you do need to have some of that live for now attitude (just not too much )
As a veteran myself, although not at any time of conflict, I thank you for your sevice.

 

[crisi]

Are you against financing cars too? Real estate is about the only asset that typically gets financed and increases in value.

Yep, generally speaking. If you need a car to get to work, then you are financing your job, not really the car, the car is just the enabler. But even then you should finance as little as possible in order to get to work reliably.

Add up all the money you spend each month on finance charges. Include your mortgage - and even give yourself the tax break. Wouldn't it be nice to have that money to spend or save every month?

The difference between financing our lives and paying cash has been two college educations in the bank (and my kids haven't left elementary school), a trip to Europe for four people, and a bill for two sets of braces that was payable in cash. Had we still been paying interest (and a mortgage) we wouldn't have any of that.

 

[shonnons]

At this point I don’t see the point of paying cash for me. I can use my home equity loan for about 4% and keep my money in the stock market where this year I am up over 20%. Resale prices are great now and I think that the prices will do nothing but go up. Maybe I am lucky I did not lose much in the recent crash but I do realize there is a risk to my logic.

 

[Doctor P]

Yes. Until my most recent purchase, I've never purchased a new car (usually 1-2 year old lease turn-ins after someone else takes the 30% depreciation hit) and usually drive them until they're no longer drivable. I paid cash for them. With my current vehicle, I bought it in October, 2001 at 0% interest when they were giving cars away (post 9/11). If it wasn't for the 0% interest, I would have paid cash. Instead, I took that cash and bought things when other people were selling them (investments). I "splurged" by getting a new car instead of a used one, but that's the last time I'll do that. Of course, this is my own personal opinion and I recognize that it may be wrong.

Then you are absolutely clueless about finances. Assets which are used over time (5 years or more is the kind of break off I use) should generally be financed over time as a matter of principle and good financial management. If one is uneasy, payments can be accelerated and the loan can be paid off early. Indeed, I have not paid a dime of interest on the last two cars we financed. We got 0% for 60 months on one and 0% for 66 months for the other. That is borrowing on a depreciating asset which is a no-no in your book. Try to convince me that borrowing at 0% was bad. I'm waiting, LOL.

BTW, I had a financial planner tell me that you should never use a HELOC. I explained that we had a HELOC that was paid by the savings on a refinancing of the original mortgage and that the HELOC was used to pay for renovation and completion of our basement. His mouth dropped because he knew he had been caught at his own game. The problem with most general statements about debt is that people do misuse debt and get into trouble. When used correctly and judiciously, debt instruments are not only useful but often an appropriate financing mechanism for capital expenses.

 

[ssawka]

Yep, generally speaking. If you need a car to get to work, then you are financing your job, not really the car, the car is just the enabler. But even then you should finance as little as possible in order to get to work reliably.

Add up all the money you spend each month on finance charges. Include your mortgage - and even give yourself the tax break. Wouldn't it be nice to have that money to spend or save every month?

The difference between financing our lives and paying cash has been two college educations in the bank (and my kids haven't left elementary school), a trip to Europe for four people, and a bill for two sets of braces that was payable in cash. Had we still been paying interest (and a mortgage) we wouldn't have any of that.

To each their own, and yes it would be nice to have that cash on hand, but there are other non-tangibles that buying now gives us. For example, we buy a new car every 5 years. With any new car, DW drives it for 5 years and then I take it for the next 5 years and she gets the new car. Would it be financially better to not have a car payment? Sure, but this way I know that DW always has a reliable car to drive.

Just like with DVC. I could have saved and waited to buy, but DD is at the age now where she can really enjoy WDW, so I'd rather pay interest and use it now than wait until I can pay cash.

One last thing is that you need to have quite a bit of cash on hand in order to feasibly pay cash. We live well with in our means, and just to pay for necessities is $3000 a month. So, keeping with the rule of thumb of saving 6-10 months worth of cash reserves, we would need to have about $20,000 in reserves. So to even buy a minimal contract of 160 points, it would cost $16,000. That's about $40,000 you'd need to have in cash. If you're fortunate enough to have that kind of cash on hand, then congratulations! On the other hand, if you're not, I don't believe in "going without" and delaying life for the fear that something "could" happen. This is an individual call however and depends on how secure you feel your job is. Everyone needs to do their own "risk versus reward" analysis.

 

[SSR]

We got 0% for 60 months on one and 0% for 66 months for the other. That is borrowing on a depreciating asset which is a no-no in your book. Try to convince me that borrowing at 0% was bad. I'm waiting, LOL.

No need to wait. Just re-read what I actually wrote (which agrees with you 100%):

With my current vehicle, I bought it in October, 2001 at 0% interest when they were giving cars away (post 9/11). If it wasn't for the 0% interest, I would have paid cash.

Sorry if that wasn't clear. My "last time I'll do that comment" was directed more toward the fact that I bought a shiny new car, not a used one. I wasn't referring to the 0%.

 

[SSR]

Just like with DVC. I could have saved and waited to buy, but DD is at the age now where she can really enjoy WDW, so I'd rather pay interest and use it now than wait until I can pay cash.

This is huge, and an intangible factor that I think is an exception to my "rule" set forth above. This makes a lot of sense in the grand scheme of things. It would be kind of silly to "save up" to pay cash while she's 4 years old and miss out on all of the current opportunities. Putting those funds into DVC now (and enjoying them) tips the scales heavily in that direction. So, I do recognize that the financing charges often pale in comparison to the intangible value of enjoying DVC now while the kids are young.