The cost of financing

[spruce]

Our 4 contracts were paid off before full term. Without financing we would not have bought even one of them.

 

[ELMC]

Of course, there are certain amounts of risk in everything, there are no guarantees in anything in life... EVEN DVC. Paying cash could also leave you wishing you had the cash down the road. If the point being made is simply, Its more expensive to finance. I agree.

The argument could be made that it is not wise to spend all of one's available cash on a DVC purchase. I think that is a point that is sometimes lost in these debates.

 

[Paging Tom Morrow]

To the mods: Why was this moved to "Mousecellaneous"? In my opinion this is clearly falls under "anything to do with buying or selling DVC contracts". Therefore, it would much better serve the community to be under "Purchasing DVC".

 

[k3chantal]

The argument could be made that it is not wise to spend all of one's available cash on a DVC purchase. I think that is a point that is sometimes lost in these debates.

But isn't the real point behind all this is if you truly are overcommitting (using all available cash/ financing without being completely confident that you can repay) one shouldn't purchase a luxury purchase like this?

The only reason I care about how people view using their money is that if they default on their DVC loan and if many other people do too and the market becomes flooded with resale contracts and if, for some unknown reason, those resale contracts don't sell, most likely our maintenance fees will go higher than normally anticipated.

I know..... there are a lot of 'ifs' in my previous paragraph but if it ends up affecting me, I do care. When it could possibly end up costing me more money, it does make me frustrated with the decisions people make.

 

[ELMC]

But isn't the real point behind all this is if you truly are overcommitting (using all available cash/ financing without being completely confident that you can repay) one shouldn't purchase a luxury purchase like this?

Well that's the question. While I happen to agree with this statement, I find it almost impossible to share this opinion without someone becoming incredibly offended. The problem is that DVC is such an emotionally charged purchase that reason frequently takes a back seat. People talk about the wonderful family vacations they have been able to take as a result of purchasing DVC as if visiting Disney was impossible without owning. I find the whole conversation a bit troubling, but in the end I take comfort in knowing that I'm not putting myself in this position and I wish those who do the best of luck.

The bottom line is that one accumulates wealth by earning interest, not paying it. You can say that money doesn't matter all you like, but that doesn't make it true.

 

[Apps]

But isn't the real point behind all this is if you truly are overcommitting (using all available cash/ financing without being completely confident that you can repay) one shouldn't purchase a luxury purchase like this?

The only reason I care about how people view using their money is that if they default on their DVC loan and if many other people do too and the market becomes flooded with resale contracts and if, for some unknown reason, those resale contracts don't sell, most likely our maintenance fees will go higher than normally anticipated.

I know..... there are a lot of 'ifs' in my previous paragraph but if it ends up affecting me, I do care. When it could possibly end up costing me more money, it does make me frustrated with the decisions people make.

I think if you default on a loan provided by Disney or you fail to pay MF, Disney gets the property back. It works out better for Disney if a person does default.

 

[dmunsil]

After thinking about this some more, I have to reverse myself a little bit. Just a little bit, though.

For starters, when you finance something, you really can't just add up all the payments and say, "the total payments you are going to make for your Y points is $X over 10 years, so the amount you paid for the points is $X/Y." That ignores the time value of money. The payments you make in 10 years are not worth the same amount to you today as the payments you are going to make in a month. I mean, yes, you will eventually pay that number of nominal dollars. But $1000 today is not the same as $100/year for 10 years. You wouldn't accept $100/year for 10 years as a payment for a $1000 debt, nor would a bank. So you shouldn't account for money that way in your own personal finances.

But that's really a side issue, and I only mention it because it's a pet peeve of mine that comes up every time I read something in the press talking about how if you finance something, it's "really" costing you $X, where they just add up the stream of payments. I usually end up shouting at the newspaper, "Time value of money, people! It's a thing! Look it up!" And then my wife comes by and pats me on the head like I'm a crazy person or something.

Anyway, here's where I have to reverse a little bit: my real objection to financing was that you're getting 200 points worth of rooms every year, but your payments for the first 10 years are always more than you could get the rooms for cash. So I was thinking that you end up losing money for 10 years in order to finally get to experience some discounts in year 11, after which you still had the typical 15 years needed to pay off a direct purchase, after which you were finally starting to see some net financial benefit. But I realize now that's double counting.

If you pay cash up front, the buy-in is your initial deficit, and then every time you stay at WDW you're realizing a discount from the price you could have paid in cash. The difference between dues and cash prices is so large that even if you imagine you're going to get the largest discounts, you still end up paying off the initial buy-in before the DVC membership runs out, even if you bought the older resorts direct. IIRC, with a direct purchase of something like $150/point, the payoff is about 15 years if you compare against modestly discounted cash rooms.

But if you finance, then your accounting gets more complicated. First you have your initial down payment, which is an immediate deficit. Then as we've seen, your payments are higher than the cash value of the rooms. But the additional deficit each year is not the entire payments plus dues; it's the amount over what you would pay in cash for the rooms you stayed in. So when the 10 years is up, your total "nut" you need to pay off is the down payment plus the total payment stream minus the cash value of the rooms you stayed in (using an appropriate discount, because we're trying to be honest, right? )

Now, 10 years after you started, you have to pay off that amount, but it's a smaller amount than the cash price you would have paid had you bought the membership in cash at the very beginning. I need to build a spreadsheet to actually model this whole thing, but my guess is that all told it extends your final payoff by 3-5 years. So instead of paying off in 15 years, it pays off in 18-20. Which is bad, but not as bad as I had thought. And I might be wrong about that 15 years in the first place. I know I worked out that my BWV purchase at $72 would pay off in 6-7 years, so 14-15 for a $150 purchase sounds relatively correct.

And of course if you actually pay off the loan in 2 years or so, it's really not that much different than paying cash. Yes, you end up paying more money. But not that much money in the grand scheme of things. It's when you drag the payments out to 10 years that it really starts to sting.

I also think that buying a timeshare that isn't going to get you cash-positive for 15 years sounds incredibly scary, much less 18-20 years. I look at where I was 15 years ago and I was almost a different person. I hadn't even been to WDW. How can I predict that I'll still love going to WDW in 15 years from now?

This, to me, is the real problem with buying direct. Yes, in theory a DVC contract has a net present value that is substantially higher than the purchase price, even if you finance. But even for a cash purchase, it takes so long before you actually start to net out positive that it seems like there's a reasonable chance you never will. Obviously if the contract retains the kind of residual value we've seen so far from DVC, you'll probably net out positive if you use the contract for at least 7 or 8 years and then sell, even if you sell at significantly below your purchase price, because you got the room discounts for 7 or 8 years.

Too many ifs. Too much risk. Financing, while not as bad as I was making it sound earlier, still adds to the risk and adds time to the period before you actually are saving money.

 

[CraigD]

After thinking about this some more, I have to reverse myself a little bit. Just a little bit, though.

For starters, when you finance something, you really can't just add up all the payments and say, "the total payments you are going to make for your Y points is $X over 10 years, so the amount you paid for the points is $X/Y." That ignores the time value of money. The payments you make in 10 years are not worth the same amount to you today as the payments you are going to make in a month. I mean, yes, you will eventually pay that number of nominal dollars. But $1000 today is not the same as $100/year for 10 years. You wouldn't $100/year for 10 years as a payment for a $1000 debt, nor would a bank. So you shouldn't account for money that way in your own personal finances.

But that's really a side issue, and I only mention it because it's a pet peeve of mine that comes up every time I read something in the press talking about how if you finance something, it's "really" costing you $X, where they just add up the stream of payments. I usually end up shouting at the newspaper, "Time value of money, people! It's a thing! Look it up!" And then my wife comes by and pats me on the head like I'm a crazy person or something.

Anyway, here's where I have to reverse a little bit: my real objection to financing was that you're getting 200 points worth of rooms every year, but your payments for the first 10 years are always more than you could get the rooms for cash. So I was thinking that you end up losing money for 10 years in order to finally get to experience some discounts in year 11, after which you still had the typical 15 years needed to pay off a direct purchase, after which you were finally starting to see some net financial benefit. But I realize now that's double counting.

If you pay cash up front, the buy-in is your initial deficit, and then every time you stay at WDW you're realizing a discount from the price you could have paid in cash. The difference between dues and cash prices is so large that even if you imagine you're going to get the largest discounts, you still end up paying off the initial buy-in before the DVC membership runs out, even if you bought the older resorts direct. IIRC, with a direct purchase of something like $150/point, the payoff is about 15 years if you compare against modestly discounted cash rooms.

But if you finance, then your accounting gets more complicated. First you have your initial down payment, which is an immediate deficit. Then as we've seen, your payments are higher than the cash value of the rooms. But the additional deficit each year is not the entire payments plus dues; it's the amount over what you would pay in cash for the rooms you stayed in. So when the 10 years is up, your total "nut" you need to pay off is the down payment plus the total payment stream minus the cash value of the rooms you stayed in (using an appropriate discount, because we're trying to be honest, right? )

Now, 10 years after you started, you have to pay off that amount, but it's a smaller amount than the cash price you would have paid had you bought the membership in cash at the very beginning. I need to build a spreadsheet to actually model this whole thing, but my guess is that all told it extends your final payoff by 3-5 years. So instead of paying off in 15 years, it pays off in 18-20. Which is bad, but not as bad as I had thought. And I might be wrong about that 15 years in the first place. I know I worked out that my BWV purchase at $72 would pay off in 6-7 years, so 14-15 for a $150 purchase sounds relatively correct.

And of course if you actually pay off the loan in 2 years or so, it's really not that much different than paying cash. Yes, you end up paying more money. But not that much money in the grand scheme of things. It's when you drag the payments out to 10 years that it really starts to sting.

I also think that buying a timeshare that isn't going to get you cash-positive for 15 years sounds incredibly scary, much less 18-20 years. I look at where I was 15 years ago and I was almost a different person. I hadn't even been to WDW. How can I predict that I'll still love going to WDW in 15 years from now?

This, to me, is the real problem with buying direct. Yes, in theory a DVC contract has a net present value that is substantially higher than the purchase price, even if you finance. But even for a cash purchase, it takes so long before you actually start to net out positive that it seems like there's a reasonable chance you never will. Obviously if the contract retains the kind of residual value we've seen so far from DVC, you'll probably net out positive if you use the contract for at least 7 or 8 years and then sell, even if you sell at significantly below your purchase price, because you got the room discounts for 7 or 8 years.

Too many ifs. Too much risk. Financing, while not as bad as I was making it sound earlier, still adds to the risk and adds time to the period before you actually are saving money.

Although slightly against what I originally wrote, this has many of the points I was trying to convey.

My last thought on the subject is... When we do financial analysis that omit things like inflation, cost of capital, and time value of money, things are skewed. In the end, try to get the most for your money, and if you must finance, do so at the best terms, do research. Finally weigh all things financial and intangible...

I will say that there are better financing deals out there... And the options are available unsecured on the dvc membership, and have significantly better rates than DVD. I am new and not sure I can post the name of the company, but happy to PM any interested party the name.

 

[Dean]

I think if you default on a loan provided by Disney or you fail to pay MF, Disney gets the property back. It works out better for Disney if a person does default.

For timeshare in general this is almost never the case. If they get it back, it's simply added to the inventory but they have to pay the fees on it. Given that roughly half of the sales is marketing related, they'd have to get it back with around half already paid to come out even or maybe ahead a little. I'd say it varies with the specifics and how long it takes them to sell those exact points.

 

[Dean]

Although slightly against what I originally wrote, this has many of the points I was trying to convey.

My last thought on the subject is... When we do financial analysis that omit things like inflation, cost of capital, and time value of money, things are skewed. In the end, try to get the most for your money, and if you must finance, do so at the best terms, do research. Finally weigh all things financial and intangible...

I will say that there are better financing deals out there... And the options are available unsecured on the dvc membership, and have significantly better rates than DVD. I am new and not sure I can post the name of the company, but happy to PM any interested party the name.

Timeshare lending is the only company I know of that will finance a resale timeshare directly. They only do the big boys like DVC and Marriott. Their terms are generally worse than DVC's but the savings of resale will more than compensate in most cases if one is going to finance anyway. I think it's unlikely one can get an unsecured loan out of the blue much or any cheaper than DVD's financing. IMO it's foolish to risk one's home on such a purchase but sometimes there are special situations like CD's one can link to for financing and get a very good rate.

I happen to subscript the the belief's that ELMC referred to. It's almost impossible to get ahead or build wealth in general while financing. About the best you can do is treat water and hope you don't drown (some do). It's difficult to our earn poor financial choices long term.

 

[chalee94]

If they get it back, it's simply added to the inventory but they have to pay the fees on it. Given that roughly half of the sales is marketing related...

i've always wondered about this. it makes sense for most timeshares, but with DVC, the kiosks are already set up and the marketing machine is rolling anyway (most of the marketing costs seem pretty fixed). it seems like a low cost option to print a few brochures on the "classic" DVC resorts and offer them as an option to prospective buyers.

 

[disneynutz]

i've always wondered about this. it makes sense for most timeshares, but with DVC, the kiosks are already set up and the marketing machine is rolling anyway (most of the marketing costs seem pretty fixed). it seems like a low cost option to print a few brochures on the "classic" DVC resorts and offer them as an option to prospective buyers.

They did a web video on the classic resorts and they had to establish wait lists.

Disney will push the new resorts for the largest profit, then switch back to the classic resorts until the next new resort is available to sell.

Bill

 

[Kingdome8]

I like renting points. I feel great and feel like I get a great deal on deluxe places

I thought about financing and wow glad I didn't. Don't want that payment for 10 years. I do plan on saving and buying resale.

Financing is a great tool but people use it too much for everything.
How many people bought as much as house as they could then went out an financed cars, boats, timeshares, credit cards etc?
Problem is it ruins their monthly cash flow

Then they blame the banks. Lol. Just my opinion

 

[Paging Tom Morrow]

After thinking about this some more, I have to reverse myself a little bit. Just a little bit, though.

For starters, when you finance something, you really can't just add up all the payments and say, "the total payments you are going to make for your Y points is $X over 10 years, so the amount you paid for the points is $X/Y." That ignores the time value of money. The payments you make in 10 years are not worth the same amount to you today as the payments you are going to make in a month. I mean, yes, you will eventually pay that number of nominal dollars. But $1000 today is not the same as $100/year for 10 years. You wouldn't accept $100/year for 10 years as a payment for a $1000 debt, nor would a bank. So you shouldn't account for money that way in your own personal finances.

This is a very good point. There is a difference in tomorrow's dollars versus today's. I ran these numbers based on 20% down at the best interest rate (8.0%) offered by DVD. Based on 2.47% annual inflation (that's the average in the US over the last ten years based on data from http://www.usinflationcalculator.com/inflation/historical-inflation-rates/), the present day value cost of financing a 200 point contract at $165 per point with that interest rate is $42,577 or $213 per point. That's an incremental addition of 40% over the non-financed advertised price.

That being said, inflation over the last 12 months is only around 1.7%, so those present day value statistics will overstate the positive value inflation has on financing if inflation does not return to normal.

 

[ELMC]

They did a web video on the classic resorts and they had to establish wait lists.

Disney will push the new resorts for the largest profit, then switch back to the classic resorts until the next new resort is available to sell.

Bill

Now that you mention it, I wonder how much of that web video's purpose was to actually sell the classic resorts as opposed to simply chumming the waters in anticipation of the VGF release.

 

[CraigD]

Timeshare lending is the only company I know of that will finance a resale timeshare directly. They only do the big boys like DVC and Marriott. Their terms are generally worse than DVC's but the savings of resale will more than compensate in most cases if one is going to finance anyway. I think it's unlikely one can get an unsecured loan out of the blue much or any cheaper than DVD's financing. IMO it's foolish to risk one's home on such a purchase but sometimes there are special situations like CD's one can link to for financing and get a very good rate.

I happen to subscript the the belief's that ELMC referred to. It's almost impossible to get ahead or build wealth in general while financing. About the best you can do is treat water and hope you don't drown (some do). It's difficult to our earn poor financial choices long term.

There is a company called LightStream Loans. They are a subsidiary of Suntrust Bank. Very Easy approval process, and significantly lower rates than Disney direct. 5.5% on a 5 year term, 7.5 on an 8 year term, no collateral. No fees. Execeptional Credit only, but if you are qualifying for a DVD at 10%, my guess is you would qualify. Will do a Refi or resale purchase. Approval was quick and easy within 1 day.

 

[ELMC]

There is a company called LightStream Loans. They are a subsidiary of Suntrust Bank. Very Easy approval process, and significantly lower rates than Disney direct. 5.5% on a 5 year term, 7.5 on an 8 year term, no collateral. No fees. Execeptional Credit only, but if you are qualifying for a DVD at 10%, my guess is you would qualify. Will do a Refi or resale purchase. Approval was quick and easy within 1 day.

What criteria are they using to define "exceptional" credit? Is that 800+?

 

[Apps]

I happen to subscript the the belief's that ELMC referred to. It's almost impossible to get ahead or build wealth in general while financing. About the best you can do is treat water and hope you don't drown (some do). It's difficult to our earn poor financial choices long term.

Are you referring to only timeshares? For the most part, I disagree with this statement when it comes to housing, cars, and education. Why wouldn't you finance a house when many times you are earning equity while having a lower interest rate than what you should be earning on your savings accounts? I would NEVER buy a car outright if interest rates are lower than 5%! I'd rather pocket the $50k and go put it in my portfolio and I will do much better. For DVC, i agree that financing for the most part is an expensive decision...10% is really high...like a loan shark!

 

[CraigD]

What criteria are they using to define "exceptional" credit? Is that 800+?

I dont believe mine was over 800. Believe mid 700's was the qualifier.

 

[Greysword]

Outstanding post, Ken, and great points all around!

Even a ballpark figure is important for someone to use for their own decision making, especially non-finance types that wouldn't bother with the calculations.

This really helps! Also, I totally agree this post should be in the Purchasing Board, not Mousecellanous.


As for us, we are one of those families that are financing our DVC for the full 10 year term. For credibility, I am a finance analyst by trade, generally doing budgets, reporting, and analysis (ROI, cost benefit, total cost ownership, etc) for my employer. Been doing this for eleven years now. I guess I'm saying that we knew what we were getting into

When we first started looking into timeshares, the biggest argument on these boards was the cost of investing the purchase price and paying WDW vacations from that versus the sunk costs of DVC. Ah the good old days when the estimated conservative rate of return on investments was about 5-6% minimum .

At the time, I put together a good spreadsheet comparing the options, with present day value and future investments for the cash needed, the time required to save for it, and other factors (need to see if I can dig that up, but the spreadsheet may have gone the way of the dinosaurs). In all, I came the following conclusions:

1) the average break even point for financing would be about 30 years; about high 20 years compared to Value resorts, and Moderates were in the high 30 year mark. Deluxe were down the tubes (slightly above by a couple years), but I knew we'd never stay at a deluxe with regularity on cash.

2) the premium we pay for financing is the price for the intangible value we received from owning DVC by buying in early. This is where Ken's numbers shine. How much are the memories worth? His numbers provide a tangible cost for some to determine if the anticipated emotions are worth the price, or would delaying these memories (or collecting them elsewhere) be better.

For us, the memories we have made are worth the additional expense, already. Plus, we've garnered good will with friends and family that have vacationed with us or we have put up on their own vacation. In the end, the additional cost was a good value, and the value continues to mount.

Now, for my perspective on some comments...

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.

ELMC, I agree with your points in all the posts you've made in here, and I wanted to single out a few lines that caught my attention.

First, I would premise DVC being a long-term investment, since the contracts are of length and should hopefully outlast a TV or a car. That said, the recent recession validated your point on those who only received short term benefit from their timeshare purchase due to short sale or foreclosures.

As for the future income stream, this was a point my DW and I discussed; who do we want to receive the financing money (if we did finance)? In the end, we decided giving the interest to Disney would serve our personal short and long-term interests as any additional cash in their pockets might help make them profitable and remain, instead of close shop and take our DVC with them. While I know we won't effect Disney on a grand scale (they aren't waiting with baited breath for our payments), if we had to pay someone interest, better to go to Disney (we thought).

Yes, that is sorta the point. Everyone knows it's more expensive -- Paging Tom Morrow is simply trying to quantify that so thoughtful people can make rational choices. Nothing more, nothing less.And you're right, of course. But the purpose of this thread is to show what the price truly is.

With that info, people can make their own choices based on their family's situations. None of us here know anyone else's situations, and therefore, none of us here can really say whether financing is a good deal or a rotten deal for a particular family. We just know it costs more. This analysis shows HOW MUCH more...that's all.

Great summary, Jim!

The argument could be made that it is not wise to spend all of one's available cash on a DVC purchase. I think that is a point that is sometimes lost in these debates.

I agree, and cash flow is another important point to our personal decision. Financing, while more expensive, left cash in the bank that we used during the recession to great effect. As such, we have no extra debt on the other side and are in a better financial situation that may otherwise be.

Sometimes it is better to sit on the cash and finance instead of pay cash for an item, and successful businesses do this all the time.

But isn't the real point behind all this is if you truly are overcommitting (using all available cash/ financing without being completely confident that you can repay) one shouldn't purchase a luxury purchase like this?

The only reason I care about how people view using their money is that if they default on their DVC loan and if many other people do too and the market becomes flooded with resale contracts and if, for some unknown reason, those resale contracts don't sell, most likely our maintenance fees will go higher than normally anticipated.

I know..... there are a lot of 'ifs' in my previous paragraph but if it ends up affecting me, I do care. When it could possibly end up costing me more money, it does make me frustrated with the decisions people make.

A DVC owner that defaults on their loan will not effect the individual annual dues required, since all expenses are added and divided by total points in a resort. DVD owns all foreclosed points, so they (technically) make the dues payments for them. Individual owners will not receive a higher burden. This case also recently played out with the recession.

As for the idea of over committing without being able to repay, I don't think many in this nation saw the recession on the horizon, despite ample warning. I would think most who finance are employed with a stable job, and they did (do) not anticipate being terminated. Also, I do not think DVD would let those in serious danger of over committing get financing; however if they do, the foreclosures are calculated into the loan's risk analysis.