My Thoughts in Favor of Financing

[crisi]

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.

That's a little different. That's financing as part of financial planning. Its still risky in that if the market drops and you loose your job, you have to have a cushion of "safer" cash....but leveraging in that way can be smart. I do that a lot.

 

[crisi]

Everyone needs to do their own "risk versus reward" analysis.

Yep, and I'm VERY conservative. But I also don't think kids NEED regular Disney vacations to have a happy childhood or make memories. And the reward of those memories over other memories that would be less expensive to create if I had to finance DVC would not be worth the extra expense to me.

Last year we went to Disney, we went to Europe, went to the North Shore....and the kid's favorite vacation of the year - a fall weekend at a farm an hour from home that was a freebie. Had Disney or Europe been a real stretch for us and I was still paying those bills, I think I'd really be questioning the value. (And we loved Europe).

 

[sssteele]

I have bought a few used cars in the past, and found them generally expensive to maintain (frequent repair bills). As my financial position improved, I have bought only new cars (generally Hondas), changed the oil more frequently than recommended by the manufacturer, had all recommended maintenance done by the dealer, and kept all of them for over 200,000 miles. My decision to finance (3 years, low interest rate) seems a good one to me. But who knows? Maybe I bought the wrong used cars. Things are not always so cut and dried. I believe the decision to finance our DVC (for 3 years) made sense, because of variables that can't be predicted, such as room price increase, DVC price increase, rate of return on funds if used for saving or investing, etc. Life sometimes is a "crap shoot."

 

[DenLo]

......
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? .....
- Chris

Financing anything that is a want versus a need is poor financial planning IMHO. And by financing something you can't really afford is risky. What if something happens to a breadwinner or he/she loses their job. Will he/she be able to make the monthly payments for the loan plus pay the MF? And will a family be able to afford to even go to WDW for a vacation without borrowing more money? Just because a DVC member gets a room at WDW the expenses don't stop there.

I think the problems with the banks and repossessed homes and the amount of debt on credit cards right now shows how Americans live for the now and don't worry about the future. And maybe that needs to change. What are we teaching our children? It's okay to buy things you can't afford. Or should we be teaching them to save their money and buy something more reasonable.

Sorry for preaching, but I am truly worried these things.

 

[SSR]

Sorry for preaching, but I am truly worried these things.

Obviously, I concur with you. One bright spot I'd like to point out is that I've noticed a lot more advertising for layaway at big stores. Kind of retro-financial. I like it.

 

[ssawka]

I think the problems with the banks and repossessed homes and the amount of debt on credit cards right now shows how Americans live for the now and don't worry about the future. And maybe that needs to change. What are we teaching our children? It's okay to buy things you can't afford. Or should we be teaching them to save their money and buy something more reasonable.

I agree that there have been many people that got in over their head, but on the flip side, I've seen quite a few people that died with lots of money in the bank because they were always worried about the future. It's a shame that they did not get a chance to enjoy it. Somewhere there needs to be a balance between the two extremes.

Debt in and of itself is not evil, but it is important to know how to manage it. Ask any MBA student if debt is good or bad, and their answer will most likely be "it depends!" Even for a luxury item like DVC "it depends". If you are planning on going to Disney anyway, then it is far better to apply the money towards a DVC membership then to simply pay Disney one vacation at a time. Again it also depends on your comfort level and how secure you feel with your job.

Right now I feel that my job is pretty secure and I know what we can and cannot afford. I also know that financing through Disney is probably the safest way to finance since if worst comes to worst and you cannot sell your contract (not likely), you could simply default and not affect your credit rating. Disney will simply resell the points. Now, I am not advocating doing that, I am simply pointing out that it is far less risky then a HELOC. IMHO, refinancing or a HELOC should be used to make improvements to your house because you never know how the real estate market will turn and if you are going to put your house at risk by increasing the principal, then it should be for things that actually increase the value of your property.

 

[Greysword]

Thanks for the thoughtful discussion, everyone! The arguments presented by both sides are likely to be helpful for thos interested in the viability of purchasing a DVC contract.

Sorry for preaching, but I am truly worried these things.

DenLo, I'm glad that you are worried, and I think everyone that has given their opinion seem to have a healthy respect of teh current economic conditions. My grandparents were in the camp that said paying off the house was #1, and they scrimped a lot to get that accomplished in a couple years. I also appreciate SSR and Crisi's inputs on being more watchful about personal finances, as too much spending is definately a neagative, especially if going on a trip is stretching things.

I think it is important to note that ssawka has hit on one positive aspect of financing through Disney versus another agency, and that is the insurance (sort of) that Disney will be able to recoupe their losses should a foreclosure be needed (by reselling the points) and the possibility that the negative transaction may not impact my credit (due to no reporting).

In the original post, I wanted to add into the equation some intangible aspects, which I feel you guys have addressed fantastically! This is one part that may get lost into the decisions when we gaze over our spreadsheets and try to calculate the time value of money .

Thanks nunzia, and thank you for your service, too! My comments were to try and add a little context to the value of not waiting too long simply due to the desire to save just one more year (as ssawka as mentioned).

To add to the current discussion, DVC has a few benefits that help offset some costs. The first and foremost are likely the full kitchen and washer/dryer in the 1BR and up. Our food costs are relatively low compared to guests that may have to pay for dining (when the free program is not offered). The ability to bring fewer cloths due to the washer/dryer (or even free laundry facilities for studios) is now seeing actual financial benefit, as we take fewer bags and don't need to pay as much in airline luggage fees. This could be from $20-$100 in savings.

Annual Pass discounts could also be a benefit for some (we use the current military programs if possible); speaking of which we received a new offer to receive 4 APs (2 WDW and 2 DL) if we add 100 points to VGC (off topic on my own thread ).

Are there any other small financial benefits you actually reap from your DVC membership that add up and may be seen to offset any extra costs (including the finance rate)?

- Chris

 

[crisi]

I've seen quite a few people that died with lots of money in the bank because they were always worried about the future. It's a shame that they did not get a chance to enjoy it.

Maybe. But maybe the security having that money in he bank gave them was their enjoyment. Some people can't enjoy things if they worry about money. Or maybe passing that money to their children and grandchildren is their enjoyment. Or leaving that money as a legacy to charity. Maybe, like Uncle Scrooge (who certainly spends his ample money on a huge mansion and cars - Uncle Scrooge is rich - but he really isn't a Scrooge) they get their enjoyment from swimming in it. And honestly, I know a LOT of people who have lost homes.....and I don't know anyone who died with a lot of money and didn't have the balance between saving and spending. The people I know who died with money also spent their money.

 

[marynvince]

It's not often people will admit to making a bad decision.

Those who finance through Disney can give 100 reasons why it was absolutely right for them.

Those that pay cash will tell you, it too is really the best way to go.

The problem with living life rationalizing every decision is that it takes away the responsibility of having to make sensible choices.

And we've all recently seen where the lack of sensible choices can lead an entire economy.

 

[logan115]

We (like many others I assume) paid cash for part, and financed the balance (roughly a 50-50 split) on a CREDIT CARD But that card had a special at the time of 1.99% for life, so for me it was an easy decision to have the best of both worlds - buy DVC and still have a nice chunk of emergency money sitting in the bank.

When we bought, in addition to using for years after, one of the things that pushed us over the edge was that we planned on taking each set of grandparents on a trip, which if we were renting at $10/pt would've meant paying cash of about $3K per trip. Would I have been better off paying $6K out of pocket for these trips, or $6K out of pocket, and interest on another $6K ? To avoid confusion, we bought 160 pts and with banking/borrowing we'll have a 2BR for a week in 2010 and 2011. We'll skip 2012 and then we hope to go to WDW 2 out of every 3 years for a week in a 1BR.

Is it worse financially to pay $3000/yr for a 2BR rental, or $3000/yr in payments/MFs for DVC ? Don't see much difference, only that the DVC payments end at some point, and then you're either staying on MFs or you sell DVC and recoup some of your cash.

I think it's great that some folks have enough cash to pay cash for everything - kudos to you, but I certainly have no problem with financing stuff either.

I'll agree that financing at ridiculous rates is insane, but I disagree with the concept of "don't finance anything because you might lose your job" mentality. I might get hit by a bus, or struck by lightning but I'm not going to sit huddled in my basement my whole life to avoid that possibility.

In all honesty, if you finance DVC and lose your job I think it's highly unlikely that your DVC payment is going to be your biggest worry, and probably not going to make any major difference one way or another in terms of real life changing events. I don't want to make them seem trivial, but guessing that paying the mortgage is much higher up the priorities list.

Chris

 

[Greysword]

It's not often people will admit to making a bad decision.

Those who finance through Disney can give 100 reasons why it was absolutely right for them.

Those that pay cash will tell you, it too is really the best way to go.

The problem with living life rationalizing every decision is that it takes away the responsibility of having to make sensible choices.

And we've all recently seen where the lack of sensible choices can lead an entire economy.

I think it is great that someone looking to purchae DVC will be able to hear both sides of the discussio, so they can make a more informed decision. That said, how do you stand on the topic?

 

[crisi]

In all honesty, if you finance DVC and lose your job I think it's highly unlikely that your DVC payment is going to be your biggest worry, and probably not going to make any major difference one way or another in terms of real life changing events. I don't want to make them seem trivial, but guessing that paying the mortgage is much higher up the priorities list.

Chris

But here is the difference, if you finance DVC and lose your job soon after buying you have a liability you are upside down in. Best case if you need to get rid of it, kiss your deposit goodbye and default. And that's assuming you don't have a ethical problem with not meeting your obligations and the only thing you worry about is your credit rating.

If you pay cash and lose your job you have an asset that can be sold off which is a pretty significant chunk of change for most people to continue to pay that mortgage. You might not get everything you hoped for from the sale, but its a little better than getting nothing.

Now, to pay cash you might need to forgo a few trips while you are saving. You might need to put off going so often and make the trips you do take less expensive than the ones you want to take. But we are talking about DVC here, the profile for most owners is they take a Disney trip every year, stay in a Deluxe resorts, and can justify financing because they spend so many days at Disney that an annual pass is a good value. You might also choose to forgo some things in your daily life to make it happen faster so you can take the Disney trips you want sooner. I don't think that this is a bad discipline to develop.

 

[ohtarabell]

But here is the difference, if you finance DVC and lose your job soon after buying you have a liability you are upside down in. Best case if you need to get rid of it, kiss your deposit goodbye and default. And that's assuming you don't have a ethical problem with not meeting your obligations and the only thing you worry about is your credit rating.

If you pay cash and lose your job you have an asset that can be sold off which is a pretty significant chunk of change for most people to continue to pay that mortgage. You might not get everything you hoped for from the sale, but its a little better than getting nothing.

Now, to pay cash you might need to forgo a few trips while you are saving. You might need to put off going so often and make the trips you do take less expensive than the ones you want to take. But we are talking about DVC here, the profile for most owners is they take a Disney trip every year, stay in a Deluxe resorts, and can justify financing because they spend so many days at Disney that an annual pass is a good value. You might also choose to forgo some things in your daily life to make it happen faster so you can take the Disney trips you want sooner. I don't think that this is a bad discipline to develop.

Pay cash and lose 50%. Finance and lose your deposit????? You aren't making your case here.

 

[crisi]

Pay cash and lose 50%. Finance and lose your deposit????? You aren't making your case here.

I'm assuming that you are financing because you don't have cash.

So you have enough in the bank for a downpayment - $2k? And you spend that on the downpayment and you get laid off. And you default and have....nothing.

Or you save your money and spend $20k on DVC. And you get laid off and you sell DVC and have $12k.

Of course if you have the cash for the purchase and choose to finance, that's a different discussion - then you are financing to get leverage. Leverage is conceptually different.

 

[ohtarabell]

I'm assuming that you are financing because you don't have cash.

So you have enough in the bank for a downpayment - $2k? And you spend that on the downpayment and you get laid off. And you default and have....nothing.

Or you save your money and spend $20k on DVC. And you get laid off and you sell DVC and have $12k.

Of course if you have the cash for the purchase and choose to finance, that's a different discussion - then you are financing to get leverage. Leverage is conceptually different.

In one case you lose 2k and in the other you lose 8k. You still aren't making your point.

 

[logan115]

But here is the difference, if you finance DVC and lose your job soon after buying you have a liability you are upside down in. Best case if you need to get rid of it, kiss your deposit goodbye and default. And that's assuming you don't have a ethical problem with not meeting your obligations and the only thing you worry about is your credit rating.

If you pay cash and lose your job you have an asset that can be sold off which is a pretty significant chunk of change for most people to continue to pay that mortgage. You might not get everything you hoped for from the sale, but its a little better than getting nothing.

Now, to pay cash you might need to forgo a few trips while you are saving. You might need to put off going so often and make the trips you do take less expensive than the ones you want to take. But we are talking about DVC here, the profile for most owners is they take a Disney trip every year, stay in a Deluxe resorts, and can justify financing because they spend so many days at Disney that an annual pass is a good value. You might also choose to forgo some things in your daily life to make it happen faster so you can take the Disney trips you want sooner. I don't think that this is a bad discipline to develop.

To be clear, I'm not advocating that everyone should buy DVC just because it's something that can be financed. I'm not advocating financing anything that people can't really afford. However, if someone is able to afford $3k or more on the lodging portion of their vacations each year I don't see them being worse off spreading out that $3K over 12 months each year.

Let me spin it a different way. If my goal is to have $50K in a 401K, am I better off waiting until I have all $50K saved up, or putting in a little bit each month ?

Clearly we're still dealing with the effects of people that over-leveraged themselves over the past few years, and I'm not hoping for a repeat of that. I applaud those that can and do pay cash for their major purchases (car, DVC, etc), but it doesn't mean that if you can't pay cash it isn't for you.

Crisi - this is NOT directed at you as I respect your view on not only this topic but countless others, but I do find some of the typical responses to this topic that are along the lines of "if you have to ask how much you can't afford it" to be insulting to be honest.

Financing is a GOOD thing, without it very few of us would have a place to call work as most business don't start out without any debt. The problem is that a lot of folks didn't have a good enough understanding of finance to know what they were signing up for (our fine regulators included).

If within you're month budget you have room for the payment, then I say go for it, if it puts you at a point where you are cutting it too close or eating into the amount you should be putting into your savings and 401k each month, then hold off.

The other option, buy a samll resale contract to get your foot in the door, and add-on when you have the ability to do so in the future.

Chris

 

[crisi]

In one case you lose 2k and in the other you lose 8k. You still aren't making your point.

In one case you have $12k in assets. In the other case you have nothing.

 

[ohtarabell]

In one case you have $12k in assets. In the other case you have nothing.

Yes, but in one case you started with two and went to zero. A $2,000 loss. In the other you started with 20 and took an $8k loss.

 

[ppony]

Just wanted to say I loved ttheh OPs post. THANKS for posting!

 

[crisi]

Yes, but in one case you started with two and went to zero. A $2,000 loss. In the other you started with 20 and took an $8k loss.

Do you care when you are trying to make a mortgage payment that you took a $6k loss over what you would have taken had you spent all your money on consumables anyway....or do you care you have an asset you can sell so you don't have your home foreclosed on?

To use the 401k example above. Last year I took a fairly large loss on my 401k. But I still have a 401k. Had I not put any money aside for retirement, I wouldn't have 'lost' any money last year (paper losses), but I also wouldn't have any money set aside for retirement.