The cost of financing

[Paging Tom Morrow]

Over the past several years, I've read several posts regarding the ills and benefits of financing through DVD. I don't think I have ever seen anyone break down the true cost of financing. I'm not going to get into things like opportunity cost or inflation, but just wanted to give the uneducated a glimpse of the true incremental cost of financing.

For reference, DVD generally offers financing for those with good credit at 10.99%. (Corrected interest rates are listed below in Post #11 http://disboards.com/showpost.php?p=48879598&postcount=11)

If you were to purchase 200 points for BLT at the current prices and paid cash, your total expenses would be:

200 points @ $165 per point = $33,000.00
Closing costs for 200 points is = $531.00
Total buy-in: $33,531 or $167.66 per point

If you were to finance through DVD, your initial prices and closing costs stay the same. Assuming you put down 10% and finance the remaining 90% over 10 years, you will pay a total of $53,216 or $266 per point for those same points.

Therefore, the incremental cost of financing for someone with good credit, who elects to take the full ten years to repay the loan in full, is almost $100 per point.

I make no judgements on how you spend your money. I only provide this information to provide perspective to those considering financing.

Happy vacationing.

 

[disneynutz]

Good info to have but it probably wont matter to most people.

Everyone knows that finance charges, Disney Dollars, DDP Meal Credits, and DVC points, don't count the same as real money.

Bill

 

[dmunsil]

The astonishing thing about financing DVC is that if you just take your monthly payment * 12 (which is $415.70*12 = $4,988.40 per year for the example above), that's more than the rack rate for 200 points worth of rooms.

The average value of a point in terms of rack rates is $23-$24 or so for studios and $15-17 for 1-bedrooms. So even with studios, 200 points only buys you $4800 worth. If you assume you can usually get some kind of room discount it just gets worse.

For certain times of year like mid-December the value gets up as high as $40/point for studios. My guess is those are the times of year the DVC salespeople use as examples to illustrate how you're still saving money even with the finance charges.

Or maybe they don't actually show you how you still save money. Maybe they show you how you save huge amounts of money comparing the dues to the rack rates, or even discounted rooms. Then using a little verbal sleight of hand, they show you how affordable the membership is with their easy finance terms.

Any way you look at it, it's not good. It could be reasonable if you could finance at a very low rate with a very good HELOC or something. But at 11%? Fuggedaboudit.

 

[Minniesgal]

I financed at 12percent and I am really glad I did. It took us 9 months to pay it off because the interest rate made me focus amd make clearing it a priority

 

[ELMC]

I financed at 12percent and I am really glad I did. It took us 9 months to pay it off because the interest rate made me focus amd make clearing it a priority

The counter argument to this (strictly financial, not judgmental) is that if you were able to pay it off in nine months, then instead you could have spent nine months saving the money, paid for the contract in cash and saved nine months of interest at 12%.

If you're saying that you needed the 12% albatross hanging around your neck in order for you to have the discipline to save so aggressively then I would suggest that there are less expensive ways to institute a savings regimen.

 

[JimMIA]

Interesting analysis, Ken. I think we all knew intuitively it made a big difference, but even I am surprised that it's $100 per point!

And...I'm not sure how many people qualify for 10.99% with only 10% down. Most of the folks I've heard getting the "preferred" rate rolleyes paid at least 20% down.

For those with less that very good credit, I believe the rate is 14.75% which would really yield an eye-popping additional cost.

 

[Paging Tom Morrow]

Interesting analysis, Ken. I think we all knew intuitively it made a big difference, but even I am surprised that it's $100 per point!

And...I'm not sure how many people qualify for 10.99% with only 10% down. Most of the folks I've heard getting the "preferred" rate rolleyes paid at least 20% down.

For those with less that very good credit, I believe the rate is 14.75% which would really yield an eye-popping additional cost.

With 20% down at 14.75%, the total payments made would be: $58,147 or $291 per point.

With 20% down at 10.99%, the total payments made would be: $51,029 or $255 per point.

 

[JimMIA]

Not having financed and not following it much, my estimate above was incorrect.

The current interest rates, updated on DVC News last month, are as follows:

DVC recently updated its interest rates charged on a direct purchase, introducing a new credit tier and varying the rate based upon the amount of the down payment. Three tiers of credit worthiness now exist, defined as Premium, Preferred and Standard. Exact credit scores tied to each tier are unknown.

Finance rates for each tier are as follows:

Premium, 10% down: 11.5%
Premium, 20% down: 9.0%

Preferred, 10% down: 14.5%
Preferred, 20% down: 10.5%

Standard, 10% down: 17.5%
Standard, 20% down: 12.5%

Buyers who enroll in the automatic payment program and agree to have funds Direct Debited from a U.S. Checking or Savings account will receive a 1% discount on the rates above.

Rates are for a 10-year loan with no pre-payment penalties.

There is a big break for paying 20% down, but overall I'm sure the net effect of this change is the rates went up for most borrowers.

 

[bakerworld]

With 20% down at 14.75%, the total payments made would be: $58,147 or $291 per point.

With 20% down at 10.99%, the total payments made would be: $51,029 or $255 per point.

20% = 8.45% 10% = 10.45%

 

[ELMC]

Here's the deal...I don't think people care. I say that not to be insulting, because your point is important and because your work and your contribution to the board is appreciated. But I think that people who are inclined to finance this purchase are not shocked at all by these numbers and might even go so far as to rationalize or disagree with them.

Frequently in conversations I have put this very same information in different terms, such as "financing adds 50% to your total purchase price" or "by financing full term you are costing yourself X number of dollars". Typically the response I receive is something along the lines of "I don't care". To be frank, I don't really understand their perspective, but I respect the fact that it is different than mine. My guess is that people compartmentalize things in such a way that they would disagree with your math above. One argument might be that they are still paying the same for the actual points, the finance charges can be written off against other line items such as what their next vacation would have cost them or some other random account. We have seen a lot of interesting analyses and justifications on here which just go to show that people are going to do what makes them happy, and not necessarily what is best for them. Based on past experience, I think that there will be several people who disagree with my assessment, and I can respect that as well.

Financing can be a very useful tool and it can help people acquire the things they need that they don't have the money for at the time, specifically necessities like a car or a home. I think that we as a culture have gone too far with it, and being able to finance things like flat screen televisions, boats and yes, even timeshares, causes more problems then it solves. In truth, despite the short term happiness that can be achieved by these items, financing is a tool used by the banks and credit card companies to insure future income streams at the detriment of the consumer. The only real way to break the cycle is to refuse to pay finance charges and delay gratification until one can afford to purchase these items outright (which may be never). Unfortunately, that is easier said than done. I speak from experience here, because up until about a decade ago I had a spend first, ask questions later type mentality. But I can tell you this...people who are financing their direct DVC purchases do not view it as paying $255 a point...they view it as paying X number of dollars a month.

 

[Paging Tom Morrow]

Based on the rates posted above:

Premium, 10% down: 11.5% $271.34 per point after financing
Premium, 20% down: 9.0% $237.41

Preferred, 10% down: 14.5% $303.37
Preferred, 20% down: 10.5% $277.85

Standard, 10% down: 17.5% $337.22
Standard, 20% down: 12.5% $269.12

For those that take advantage of the direct payment option:

Premium, 10% down: 10.5% $261.09 per point after financing
Premium, 20% down: 8.0% $228.81

Preferred, 10% down: 13.5% $292.48
Preferred, 20% down: 9.5% $267.83

Standard, 10% down: 16.5% $325.74
Standard, 20% down: 11.5% $259.82

 

[JimMIA]

Here's the deal...I don't think people care. I say that not to be insulting, because your point is important and because your work and your contribution to the board is appreciated. But I think that people who are inclined to finance this purchase are not shocked at all by these numbers and might even go so far as to rationalize or disagree with them.

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.

If someone wants DVC and they have to finance to get it, no volume of financial analysis is going to deter them. They'll simply say, "But I plan to pay it off early..." and blow off the facts right in front of them. That's their right and responsibility, and you can't take it away from them.

Nothing anyone can say will overcome natural selection. But that doesn't make the information less valuable.

 

[ELMC]

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.

If someone wants DVC and they have to finance to get it, no volume of financial analysis is going to deter them. They'll simply say, "But I plan to pay it off early"... and blow off the facts right in front of them." That's their right and responsibility, and you can't take it away from them.

Nothing anyone can say will overcome natural selection. But that doesn't make the information less valuable.

Ok, I had a feeling that first sentence would get misinterpreted. Darn, I wish I had done a better job writing it. Please allow me to clarify. I think that the OP is incredibly informative and important. I also think that it very clearly lays out the very idea that we have been discussing on here regarding financing, specifically how it prices all of the value out of owning DVC. Furthermore I care about it. I was being a bit hyperbolic when I said that nobody would care. My true point was much like what you said above. People who are dead set on financing are going to look right through all of those troublesome facts and statistics on their way to signing the contract. I would hope that someone who is considering financing a purchase would look at it and have it influence their decision, but I don't hold a lot of hope for that happening. Perhaps I'm a bit jaded.

 

[Paging Tom Morrow]

Like I said in the opening post, I make no judgements on how other people spend THEIR money. That being said, I think it's important that people understand the incremental costs that financing brings.

Most people believe that their DVC purchase will break even after six to eight years. With the recent price increases and the impact that financing has, the breakeven point is now probably closer to 15 to 20 years.

There will always be those who will want to own a piece of Disney regardless of the cost. More power to them. There are also several people who love the allure of Disney and find the advertised pricing as enticing. Many of these people do not understand the dramatic impact that high interest rates have on the overall cost of their acquisition. My posts in this thread were inputted to provide that information.

 

[sweetdana]

People who are dead set on financing are going to look right through all of those troublesome facts and statistics on their way to signing the contract. I would hope that someone who is considering financing a purchase would look at it and have it influence their decision, but I don't hold a lot of hope for that happening. Perhaps I'm a bit jaded.

I agree with above info. ... It is no different than buying a 500$ car needing a hug and having a something that looks like junk and waiting until you can pay cash for a better car... Many people ignore this option (every reason in the book) And instead finance a brand new one at 300 - 400 or 500$ a month for 60 and now 72 months of interest!!! Then instead of saving the $$ again financing a new car again. They immediately finance. Some people just do not care that 1/2 the payment in some cases is interest. ... All they care about is ending the month.

These are huge #difference... But really DVC is an emotional buy... And thinking I can buy today for 40$ less than 4 yrs and use the points certainly takes the sting off.



(Side note bias stand point here working in mortgage industry and see the financing mistakes daily... And scared to death of interest.)

 

[Paging Tom Morrow]

I would hope that someone who is considering financing a purchase would look at it and have it influence their decision, but I don't hold a lot of hope for that happening. Perhaps I'm a bit jaded.

I don't think you are jaded at all. We live in a credit-driven society. I'm of the same school as you. Financing for the very important things - homes and cars. Do my best to avoid financing items that aren't those items. That being said, I usually hold out for very low APRs on car purchases (below 1.9%) and my mortgage is at 3.5%.

There are a number of consumers who would buy a $1,000 flat screen TV and finance it at 18% over three years rather than buying the same TV from another retailed who is offering it for $1250 with three years of interest free financing. Of course, the "cheaper" listed TV becomes $51.49 more expensive of the course of the full-term, but that consumer can't "pay" $250 more at the point of sale. I think that speaks volumes.

 

[Apps]

I'll finance anything that is lower than my expected rate of return on my investments. Car, house, whatever...long as financing is less than 5%. I'd finance DVC if the rate was better. Leverage can be a great way to maximize your overall return if used properly.

 

[bumbershoot]

but just wanted to give the uneducated a glimpse of the true incremental cost of financing.

I make no judgements on how you spend your money.

Maybe not, but you sure do make a judgment on people who finance, don't you?

 

[carissa1970]

Ok, I had a feeling that first sentence would get misinterpreted. Darn, I wish I had done a better job writing it. Please allow me to clarify. I think that the OP is incredibly informative and important. I also think that it very clearly lays out the very idea that we have been discussing on here regarding financing, specifically how it prices all of the value out of owning DVC. Furthermore I care about it. I was being a bit hyperbolic when I said that nobody would care. My true point was much like what you said above. People who are dead set on financing are going to look right through all of those troublesome facts and statistics on their way to signing the contract. I would hope that someone who is considering financing a purchase would look at it and have it influence their decision, but I don't hold a lot of hope for that happening. Perhaps I'm a bit jaded.

I would have paid attention if I had read this before financing.

Here is something I have yet to be seen on any thread about purchasing DVC. We were told to create a trust for our DVC, and they would reduce the interest rate even more. So we did, and they did. I still have yet to figure out why that made a difference.

 

[nolanboys]

Thank you for this informative post. It is a real eye opener. We researched for 5 years before buying a resale contract. We may in the future buy direct for a new resort but this solidifies my opinion of only buying what can be purchased outright. The savings of DVC just get eaten away too much by financing for an extended period.