The cost of financing

[SFlaDisneyfans]

This is a great thread and I have enjoyed following it. I would like to offer my view from the outside looking in. I think the reason some people get "touchy" about threads like this is (to be perfectly honest)... They don't understand the true concepts of debt and interest. After many years being out of school, I am back finishing up my economics degree. Sitting in classes with lots of 20-somethings, I am always amazed at some of the basic life lessons that they just have no knowledge of. Things I learned at an early age and that were stressed as important.

I took a class this summer on the Economics of International Trade. Easily half of the 30+ students did not grasp the concepts of debt and interest. Keep in mind this class was taken either by business majors (as an elective) or economics majors. Even if their parents didn't tell them about interest, they had to learn about it and how to calculate it when they took college algebra.

When someone posts about the evils of debt and interest, they tend to do so because they have a firm grasp of the math that supports their position. From a mathematical perspective it makes perfect sense to them. In the same way they understand that 2+2=4, they understand that a ten year note*10.99% compounded interest=bad. But someone who doesn't understand the math behind it looks at a post and might feel they are being condescended to because the conclusion isn't as painfully obvious to them.

Just my thoughts. I think we as a society have done a piss poor job the last couple of generations in preparing our kids to succeed as adults. We do a great job teaching them how to use computers but a lousy job teaching them about the value and mechanics of money. Debt is a powerful tool. Unfortunately it has no conscious and can do as much good as it can do evil. It needs to be used properly.

 

[Apps]

The other reason that it works to a degree in big business is that there isn't personal risk. For small business (500 or less employees seems to be the cutoff), the same principles apply as for an individual.

Apps, it appears from your posts that you're of the opinion that for people to have things they are better off financing "if they can afford it" whatever that really is. I'm of the opinion that in the long run you'll have more stuff, more assets with less risk and less stress if you don't finance and you don't play games with money.

Dean, as I said in prior posts, I agree with your position on the psychology of debt and the misuse of it in our society. You and ELMC bring up great points...especially in regards to financing DVC. What I meant by affordability is that you have enough assets to pay for your purchases, but choose to finance because it has a lower interest rate than what you are getting from your own personal investments. For the most part, financing DVC with Disney isn't a wise financial decision because very few people have an expected return over 10%.

 

[Paging Tom Morrow]

When someone posts about the evils of debt and interest, they tend to do so because they have a firm grasp of the math that supports their position. From a mathematical perspective it makes perfect sense to them. In the same way they understand that 2+2=4, they understand that a ten year note*10.99% compounded interest=bad. But someone who doesn't understand the math behind it looks at a post and might feel they are being condescended to because the conclusion isn't as painfully obvious to them.

And that is the challenge right there. Those who may need the information the most may be the least likely to search for the answer.

I saw an advertisement for Western Sky Loans last night on TV. For a $10,000 unsecured loan (including a $75 loan fee), you can get approved within minutes with an APR of 89.68% with repayments over 84 months. That is not a misprint. That works out to a payment of $743.49 per month or $62,453.16 in total payments over the course of the full term. Talk about loan sharking. Unfortunately, because the company is owned exclusively by a Native American tribe, they fall outside of US guidelines on fair lending practices, but that's not the point. There are people that only see the fact they can get a 10K loan that repays over 7 years and they ignore the impact that the compounded interest will play.

 

[SFlaDisneyfans]

And that is the challenge right there. Those who may need the information the most may be the least likely to search for the answer.

I saw an advertisement for Western Sky Loans last night on TV. For a $10,000 unsecured loan (including a $75 loan fee), you can get approved within minutes with an APR of 89.68% with repayments over 84 months. That is not a misprint. That works out to a payment of $743.49 per month or $62,453.16 in total payments over the course of the full term. Talk about loan sharking. Unfortunately, because the company is owned exclusively by a Native American tribe, they fall outside of US guidelines on fair lending practices, but that's not the point. There are people that only see the fact they can get a 10K loan that repays over 7 years and they ignore the impact that the compounded interest will play.

I saw those ads. We backed up the DVR and froze the screen so I could read the fine print because I couldn't believe I read it right the first time.

 

[ELMC]

And that is the challenge right there. Those who may need the information the most may be the least likely to search for the answer.

I saw an advertisement for Western Sky Loans last night on TV. For a $10,000 unsecured loan (including a $75 loan fee), you can get approved within minutes with an APR of 89.68% with repayments over 84 months. That is not a misprint. That works out to a payment of $743.49 per month or $62,453.16 in total payments over the course of the full term. Talk about loan sharking. Unfortunately, because the company is owned exclusively by a Native American tribe, they fall outside of US guidelines on fair lending practices, but that's not the point. There are people that only see the fact they can get a 10K loan that repays over 7 years and they ignore the impact that the compounded interest will play.

Insanity. And just so you know, you just presented the best offer they have. If you want to borrow $850, there is a $350 loan fee and rates of 342% over 12 months.

Although not as usurious, a parallel can be drawn to Disney financing with regards to the mentality behind it. A lot of people buy DVC based on the monthly payment that they can afford, without ever taking the time to add all those payments up and see what they were really paying. As an aside, this is the same type of thinking that contributed to the housing bubble, where mortgage brokers would encourage people to buy more house than they could afford based on low (and variable) rates. It was the first time in my 20 years experience in real estate that I saw houses being bought and sold based on a monthly payment and not the asking price. It's a dangerous, dangerous game.

Dean, as I said in prior posts, I agree with your position on the psychology of debt and the misuse of it in our society. You and ELMC bring up great points...especially in regards to financing DVC. What I meant by affordability is that you have enough assets to pay for your purchases, but choose to finance because it has a lower interest rate than what you are getting from your own personal investments. For the most part, financing DVC with Disney isn't a wise financial decision because very few people have an expected return over 10%.

While I completely agree with the math here, sometimes there's more to it than the math (something I rarely say). I could have invested the money I spent on DVC. Same could be said for money I spent on new clothes, food, vacations in general, entertainment, etc. Sometimes it is wise to simply look at something as an expense and write it off as such, and save investing for money you have earmarked for investments. While not the optimal mathematical situation, I do believe it pays dividends in other ways, just one of which being the value of living debt free.

 

[Paging Tom Morrow]

As an aside, this is the same type of thinking that contributed to the housing bubble, where mortgage brokers would encourage people to buy more house than they could afford based on low (and variable) rates. It was the first time in my 20 years experience in real estate that I saw houses being bought and sold based on a monthly payment and not the asking price. It's a dangerous, dangerous game.

Very true.

We bought our first house in 2003 even though we weren't in the financial situtation that I really desired. I basically thought that a 5.5% APR for a house was absolutely ridiculous based on the interest rates the previous 20 or so years. We bit the bullet and would up paying a small PMI for a year so that we could take advantage of the interest rate. My thinking at that time was that 5.5% was likely the lowest point of the interest rate market and paying PMI for a couple of years was like having a 6.5% mortgage, which still would have been good historically speaking.

Flash forward 10 years, where we are now sitting in a much larger and nicer home with a 3.5% APR.

Because both of those interest rates were locked, we used the monthly payment as a guide for where our pricing range was. Taxes up here are add a significant chunk to our monthly payments as well and can very pretty signicantly from home to home, so it makes a lot of sense to look at the whole picture.

Some of my friends took advantage of short term variable rates and when the market collapsed, many found themselves in a very different financial situtation than they expected.

 

[Dean]

Cars I have to disagree slightly. Ill finance when it's a zero percent deal or through my credit union at 1.79%. Why pull out the money from my brokerage or savings when it's earning a much higher rate of return?

I can make a clear example but its not the norm back in the early 2000's I bough into the google IPO and at the same time I was buying a brand new car I opted to finance the 30k car at zero percent and put the 30k into the IPO. The IPO in fact worked out very well.

Sent from my iPhone using DISBoards

If your car were paid off would you finance it again at 1.79% interest to invest those dollars?

Dean, as I said in prior posts, I agree with your position on the psychology of debt and the misuse of it in our society. You and ELMC bring up great points...especially in regards to financing DVC. What I meant by affordability is that you have enough assets to pay for your purchases, but choose to finance because it has a lower interest rate than what you are getting from your own personal investments. For the most part, financing DVC with Disney isn't a wise financial decision because very few people have an expected return over 10%.

I do realize were splitting hairs at times and that most of us aren't really that far off in practice but I do enjoy discussing the topic when it's civil and I did want to be clear where my principles and positions are. And I want to be clear that just because someone made a given choice, does not make it a good one and I DON'T want enough info that I can make a judgement on a given person's situation unsolicited, only the principle involved.

 

[z28wiz]

If your car were paid off would you finance it again at 1.79% interest to invest those dollars?

I do realize were splitting hairs at times and that most of us aren't really that far off in practice but I do enjoy discussing the topic when it's civil and I did want to be clear where my principles and positions are. And I want to be clear that just because someone made a given choice, does not make it a good one and I DON'T want enough info that I can make a judgement on a given person's situation unsolicited, only the principle involved.

All depends I was only about 23 at the time. Right now I would finance again at that low rate to keep my money put. But the car loan rate would have to be under two percent. But that's just me. My financial situation and occupations allow it.

Sent from my iPhone using DISBoards

 

[CraigD]

This is a great thread and I have enjoyed following it. I would like to offer my view from the outside looking in. I think the reason some people get "touchy" about threads like this is (to be perfectly honest)... They don't understand the true concepts of debt and interest. After many years being out of school, I am back finishing up my economics degree. Sitting in classes with lots of 20-somethings, I am always amazed at some of the basic life lessons that they just have no knowledge of. Things I learned at an early age and that were stressed as important.

I took a class this summer on the Economics of International Trade. Easily half of the 30+ students did not grasp the concepts of debt and interest. Keep in mind this class was taken either by business majors (as an elective) or economics majors. Even if their parents didn't tell them about interest, they had to learn about it and how to calculate it when they took college algebra.

When someone posts about the evils of debt and interest, they tend to do so because they have a firm grasp of the math that supports their position. From a mathematical perspective it makes perfect sense to them. In the same way they understand that 2+2=4, they understand that a ten year note*10.99% compounded interest=bad. But someone who doesn't understand the math behind it looks at a post and might feel they are being condescended to because the conclusion isn't as painfully obvious to them.

Just my thoughts. I think we as a society have done a piss poor job the last couple of generations in preparing our kids to succeed as adults. We do a great job teaching them how to use computers but a lousy job teaching them about the value and mechanics of money. Debt is a powerful tool. Unfortunately it has no conscious and can do as much good as it can do evil. It needs to be used properly.

Probably the best post on this thread, in my opinion. I am astonished how college students are not forced to take persona finance classes, even prior in high school. My kids are already learning this through allowance and responsibility. While my wife does not completely agree with my philosophy, they also have to make these sort of decisions early and often as practice makes perfect.

Now my thoughts...

MANY fee based financial advisors (not commissioned brokers) will suggest never paying off your house for both Tax and cash reasons. This is an example of power as a mechanical tool. However, those financial advisors do not say go buy the biggest most expensive house you can afford to max your tax write off, they say to buy one that you can afford for the long term. The only way that financing to keep your money in your portfolio is to actually have or place the money in your portfolio.

With that said... Whille I prefer the finance with the cash in the bank approach and have executed this approach, it is nearly impossible to outrun the 10+ percent as thers have mentioned.

However, look at it this way... This argument paralells the argument of buying directly with Cash or Buying Resale even if you did so with Cash. I chose to buy resale at BCV in the $80\pt range with better financing than DVD. I choose my deal, compared to 150\pt for the gorgeous new VGF property Directly. Even with a cash purchase direct vs. cash purchase resale, I could not in my head find enough value to go DVD at 2x the price, although I was tempted by the gorgeous propety. Much of being WEALTHY has little to do with money, in fact, what good is any wealth if you cannot enjoy it, and people find value in different items. I have never been, the fancy car or brand name clothing type, but dont skimp on a good restaurant and opt for the good beer vs. watered down swill. The price difference in DVD VGF vs. Resale BCV, provided me with the value required to move forward. This can be viewed similar to someone who finds value in keeping the cash in the bank even at 10 or 14% vs. someone who pays cash. To me, affordablity is a totally different subject... If you cant afford DVC in the first place, then the subject of finance or non fnance is really a non issue. Buy at all costs is scary, and I would bet that financing at 10% is not always a buy at all cost scenario.

 

[chalee94]

i don't know if this has much of a chance or not but it might be interesting to watch...

CNBC story on mortgage interest deduction

Congressional action on the U.S. tax code could dramatically alter one of its sacred cows: the mortgage interest deduction. And the change could come in 2013...

The various proposals would have a tax credit from a low of 12 percent to a high of 15 percent, without the need for taxpayers to itemize their returns. The proposals would limit the mortgage interest covered in the credit up to $500,000, or half of what it is now. All but one of the major proposals would eliminate the tax credit for a second home.

 

[honeybunches]

I have to disagree with this somewhat. Although I know there are many "...don't care what it costs, how much are the payments?" people out there, I think this thread is valuable because it makes the real costs crystal clear to anyone who wants to know. To that end, this is a very good contribution.

Thanks for the breakdown and for talking me off the ledge. I am that person who really wants it. In fact, the box of info just arrived today. Your numbers caused me to pause and look beyond my Mickey-shaped glasses for a moment. The suggestion of just saving the monthly amount is well taken too. Thanks again!

 

[SuperRob]

When it really comes down to it, there are few things in life REALLY worth going into debt for. At least, that's what I keep telling myself, because VGF points have been calling my name.

We paid cash for our points, and while we don't have nearly as many as we'd like, we have enough for us for now. When we want more, we'll save up to get more, and again, it won't be as much as we want, but it'll be enough.

The interest rate DVD charges when you compare to a credit card looks pretty good, and I think that's how people look at it. (PLEASE, FOR THE LOVE OF GOD, DON'T CHARGE YOUR POINTS ON A CREDIT CARD!) Compared to mortgage rates, they're horrible, though, and that's how you SHOULD be looking at it. It's a real estate interest you're buying.

But nothing changes the fact that you could probably get double the points over time if you didn't finance. Is it really worth it to get the points now, but get less than you COULD have? Probably not.

We want more points, but we're vacationing nicely enough with our limited points right now.

I will say that the SOLE exception to any of this might be if you get some sort of financing deal where you're paying very little in interest, or potentially even 0% for a time. If you can pay that off before the rates kick in, that would be a pretty great deal. But in my experience, few people are disciplined enough to be able to get it paid off before the rates kick in. And even some that are might have something unexpected happen. Cash is always the safest way to go.

 

[Greysword]

Great points, if this is viewed from a strictly financial point of view. debt is a tool, which is neither good nor bad. It is a means to an end. If used wisely, debt can provide significant value; however, value and worth are very subjective, so I tend to steer clear of these statements, instead focusing on the financial impact to help determine value. This thread does a great job of this.

A couple of arguments:

The interest rate DVD charges when you compare to a credit card looks pretty good, and I think that's how people look at it. (PLEASE, FOR THE LOVE OF GOD, DON'T CHARGE YOUR POINTS ON A CREDIT CARD!) Compared to mortgage rates, they're horrible, though, and that's how you SHOULD be looking at it.

Great points, and I agree. However, comparing this financing to mortgage rates may be a stretch due to the nature of the asset...

It's a real estate interest you're buying.

While it is tempting to think of our contract as "real estate", it is closer to a depreciating asset than and appreciating one. This is mainly due to the nature of timeshares and being a term contract. Comparisons to automobiles is likely more accurate, despite the depreciation differences. Unlike an automobile, a DVC contract will have no salvage value once the contract is fully appreciated, but this is balanced due to the longer term.

But nothing changes the fact that you could probably get double the points over time if you didn't finance. Is it really worth it to get the points now, but get less than you COULD have? Probably not.

I would say possibly not instead of probably. Do we want/need more points? Can we afford more points from an annual dues perspective?

Despite being able to buy more later if a family saves versus buying now with financing, it may make more sense to buy in early and pay the finance charges instead of waiting until they can afford to pay cash. One example would be a family that vacations annually at a deluxe resort. Another may be purchasing at a new resort with a full 50 years on the contract. Still another may be a Disney family with young children.

In my opinion from a financial perspective, it comes down the true break even point. If the break even point all in with purchase price, finance charges, and dues comes out even or less than the cost of vacationing at Disney over the family's anticipated term of the contract (how long they plan to hold it), then DVC is worth the expense. Of course, assumptions need to be made in how long the family is likely to actually visit the Disney resorts, the cost of non-DVC resort rooms, and the annual increase in dues. DVC does help this a bit with Aulani, since teenagers and older members may be more willing to visit this resort once the parks get boring.

I will say that the SOLE exception to any of this might be...

While I think my comments previously covered this, I wanted to finish by saying the sole exception is for your family and definitely varies based on the needs and perceptions of other families. We can't forget nor discount the intangibles when making a final decision, but the ideas you expressed and those within the thread on the financial aspects definitely need to be a large part of the equation.

 

[Sandisw]

Great points, if this is viewed from a strictly financial point of view. debt is a tool, which is neither good nor bad. It is a means to an end. If used wisely, debt can provide significant value; however, value and worth are very subjective, so I tend to steer clear of these statements, instead focusing on the financial impact to help determine value. This thread does a great job of this.

A couple of arguments:

Great points, and I agree. However, comparing this financing to mortgage rates may be a stretch due to the nature of the asset...

While it is tempting to think of our contract as "real estate", it is closer to a depreciating asset than and appreciating one. This is mainly due to the nature of timeshares and being a term contract. Comparisons to automobiles is likely more accurate, despite the depreciation differences. Unlike an automobile, a DVC contract will have no salvage value once the contract is fully appreciated, but this is balanced due to the longer term.

I would say possibly not instead of probably. Do we want/need more points? Can we afford more points from an annual dues perspective?

Despite being able to buy more later if a family saves versus buying now with financing, it may make more sense to buy in early and pay the finance charges instead of waiting until they can afford to pay cash. One example would be a family that vacations annually at a deluxe resort. Another may be purchasing at a new resort with a full 50 years on the contract. Still another may be a Disney family with young children.

In my opinion from a financial perspective, it comes down the true break even point. If the break even point all in with purchase price, finance charges, and dues comes out even or less than the cost of vacationing at Disney over the family's anticipated term of the contract (how long they plan to hold it), then DVC is worth the expense. Of course, assumptions need to be made in how long the family is likely to actually visit the Disney resorts, the cost of non-DVC resort rooms, and the annual increase in dues. DVC does help this a bit with Aulani, since teenagers and older members may be more willing to visit this resort once the parks get boring.

While I think my comments previously covered this, I wanted to finish by saying the sole exception is for your family and definitely varies based on the needs and perceptions of other families. We can't forget nor discount the intangibles when making a final decision, but the ideas you expressed and those within the thread on the financial aspects definitely need to be a large part of the equation.

We were one of the families you mentioned..yearly visitors to a deluxe resort who had no plans to stop. At first, we thought we needed to finance and decided that it would be worth it, if we didn't increase the expense for our yearly 5 night trip...as it turned out, we worked things in a way that didn't require it, but weighed the cost of finance as less important to use than giving up a trip for a few years to "pay cash".

Of course, I realize that others do not feel the same way, and that is okay. Financial decisions really are personal and the financial goals of everyone are not the same. I do agree that it is crucial for anyone considering financing DVC that all the "what if"s are considered...what will the resale value be the minute I buy...how long do I need to own before I would be able to sell and pay off the loan balance...if I couldn't, am I okay with taking a loss? How stable is my employment?, etc., etc.

As long as people have weighed the pros/cons of financing, then whatever they decide is right for them. For us, when we bought in 2009, even with financing, we knew we had to own for 5 years and be able to sell for 50% of buy in cost at that point In order to make DVC no more expensive then our cash trips with Disney, assuming a 30% discount. Anything else, would make DVC more expensive. Weighing the be benefits vs. the risks, we went for it. As I as said, we didn't need to finance, so now that we are 4 years in and BLT is still selling around what we paid, its worked out.

And yes, I expect to take some heat for this stance.

 

[Msmithmd]

Giving sandisw heat.

Just kidding. As long as you grasp that finance charges are paying money for nothing, it's really your call. Heck, lots of families go deep into debt on credit cards, to stay on CRO reservations at deluxe resorts every day. So it's totally legitimate that financing dvc can be better than other options.

That said, versus saving and paying cash for a luxury expenditure, there's really no debate. And that isn't exclusive of the reality that even a financed purchase can make sense in the long term. As long as a person isn't overextending and putting at risk their essentials (home, transportation), it is certainly their call. It's easy to analyze the strict numbers. But value (beauty) is in the eye of the beholder.

 

[jodifla]

Threads like this always make me think of the movie UP. Time is money, folks.

We financed, WAY back in 1996. Of course we knew it would be more money than paying cash.

But back then, points were $63ish, and our payout was in 5 years. We were also going to WDW several times a year. SO, we shifted the hotel costs we were already paying into our DVC payments. We were also DINKS, and wanted to buy DVC before kids came along. We also had aging parents, and had hoped to have them visit while they were still with us.

We also tend to put money into long-term retirement savings, and not take it out. So we held off buying a new car, and bought the DVC instead. The payments were about the same. Paid it off before our son was born, and before one of us went to part time.

Plan worked brilliantly for us, especially considering how much points cost now. I read about people who have been trying to pull the trigger for 15 years. They could have owned DVC outright for 10 years by now! I'm so glad we didn't talk ourselves out of it.

 

[SuperRob]

Great points, if this is viewed from a strictly financial point of view. debt is a tool, which is neither good nor bad. It is a means to an end. If used wisely, debt can provide significant value; however, value and worth are very subjective, so I tend to steer clear of these statements, instead focusing on the financial impact to help determine value. This thread does a great job of this.

Thank, Greysword. I appreciate the feedback. We all come from different places and that colors my own advice, of course. I know that for me, I don't handle debt well. My ex-wife and I had debt problems in our first marriage (that I'm still working out from under), and I know part of that we both had an an "enjoy it now, worry about it later" mentality. I am slowly but surely training myself to view debt as a tool, but even then, I'm leery. I will say that irresponsible usage of debt is a big problem in our country, which is why when I give advice, I tend to push against it. My new wife is a great help, since she's so good with our money.

If you can responsibly use debt like the tool it is, there is absolutely nothing wrong with it. In fact, we have credit cards we use for our daily spending, which we always pay off (sometimes multiple times a month!) But from my own personal experience, it is far too easy for something to go wrong when you're making a multi-year commitment at a relatively high interest rate. As many learned during the housing crisis, banks are not your friends. I find it's best to keep them at arms length whenever possible.

 

[sfbntpc]

My husband and I hate the interest rate, we even looked into getting a separate bank loan but those rate are not that great either (even with excellent credit) We did set it up through our bank to do Bi-Weekly payments, so they send half the payment every other Friday