With the cost of timeshare now running into significant sums the idea of financing the purchase via a loan is becoming the norm. It is fair to say that a significant number of enquiries we receive at TCA are relating to finance agreements. Major financial institutions such as Hitachi Capital, Barclays Partner Finance and Shawbrook, to name but a few have all jumped on the bandwagon supplying finance services to resorts to facilitate purchase. These institutions are all regulated by the Financial Conduct Authority (FCA) to carry out their business, also, though not commonly known, the resorts, or their finance brokers must also be regulated by the FCA. This of course only applies to finance arranged through UK lenders, loans for say American resort purchase, if arranged through an American bank, will have their own regulatory regime.
Types of loan
For most loans there are two main types that would apply to timeshare purchase:
Unsecured Personal Loan
Unsecured personal loans are the most common type of personal loans available on the UK market. And they have been around for a long time. However, thanks to the internet, how they are used and accessed is changing rapidly. Most people can now make unsecured loan applications via the internet. Many traditional banks offer this service, as well as newer and smaller lenders that only operate online. An unsecured loan is exactly what is says, you need offer no security guarantee in order to obtain one.
Secured Personal Loan
Secured loans work by securing the money you borrow against something that you own. In most cases, this will be your home. But there are some instances when you can secure the loan against your car or another kind of high-value possession of yours. It’s up to you to decide what you want to secure the loan against. But, of course, it will need to be approved by the loan provider.
In the case of a timeshare it is common practice to opt for an unsecured loan, primarily the loan process is much quicker, in fact agreement may take minutes whereas a secured loan can take much longer given that security has to be investigated and documentation prepared.
Interest
It is academic as to which of the above is chosen, suffice to say interest will be payable. Unsecured loans often have a higher rate of interest because the lender has no security in the event of a default. It is of importance that you fully understand the overall cost of finance. The FCA has rules in place to ensure that the full ramifications of the loan are clearly explained prior to signing the loan agreement, this is known as “pre contract information”.
Looking at a true example from Hitachi Capital it may be observed that the facts have been fully disclosed and from the figures we will share, you really need to think carefully:
Loan Amount – £8,452
Loan Term – 15 years (180 months)
Interest rate – 7.2% pa
Annual Percentage Rate (APR) 11.9% pa
Total cost of finance – £17,571
From these figures we can see that the interest rate is quite a bit higher than a secured loan (average UK secured loan interest rate 3.5% APR) but the real point is that the cost of the timeshare is £8,452 but the overall cost including interest is £17,571 this is over double the amount borrowed. The monthly repayments are £97.62 throughout the term so that means an annual cost of £1,171 in interest and capital repayments.
Terminating ownership
A common thread from enquirers is on the subject of ownership termination. Many feel what they own is not what they thought, many often state they don’t want the ownership anymore for whatever reason. Now although many timeshare resorts make it difficult to exit let’s assume for the purpose of this article that you can simply walk away from your ownership. You hand back the documentation and have freed yourself from annual maintenance and any further dealings with the resort, BUTyou have NOTcancelled your finance. As far as the finance company is concerned you borrowed money to buy something, they don’t really care what the “something” is, it is still a loan that contractually demands repayment.
Total termination
Total termination requires that not only is your ownership cancelled but you extinguish the finance which means you either carry on paying out the monthly amount or clear the loan completely. In the example above, if you terminate your membership after say the third year you will still owe approximately £14,000, ouch! There is absolutely no way out of this conundrum. What could possibly be worse than cancelling your ownership so no more holidays then still have to pay £14,000 for the privilege?
Section 140 Consumer Credit Act 1974
There is a glimmer of hope in the form of the above legislation but it must be said only a glimmer. S140 covers unfair terms in credit agreements and normally only applies to what are known as “associated loans” these are loans that have a defined association with the purchase but more importantly there has to be unfair terms.
An example in timeshare would be a loan for the purchase but the timeshare contract states; “failure to pay annual maintenance fees will result in the loss of ownership” This would certainly be classed as an unfair term. Nowadays the same statement will read “failure to pay annual maintenance fees will result in the suspension of ownership rights and use”this is an entirely different clause and is not deemed as being unfair as it does not involve loss of ownership. It must be remembered that timeshare resorts have excellent legal departments at their disposal so they will adjust current and future contracts to avoid possible legal pitfalls.
If you took out finance some time ago there is a possibility that section 140 may apply but it should be noted that expert legal advice will be necessary to engage in such a claim as they are very complicated and the chance of success is unfortunately minimal.
Another possibility, although mostly in the USA, a number of resorts do offer in house finance meaning the resort or management group supply the funds for purchase which does not involve outside lending institutions, in these cases there may be an opportunity to legally negotiate a termination of the loan along with the ownership. Needless to say specialist advice is needed, we are aware that M1 Legal, a leading Spanish legal practice has concluded a number of cases following this route.
Be Careful
For those reading this who have taken recent finance it is likely that you are caught between the devil and the deep blue sea. For those considering a purchase using finance you need to seriously consider all the facts before signing away a considerable sum of money over a considerable period of time. Apart from the initial cost, paying £300, £400, £600 and in some cases considerably more in annual maintenance fees for a week at a mediocre or non- exclusive member resort no longer makes sense. Timeshare is not the answer to holiday needs; you can enjoy the freedom to choose from a variety of luxury holidays, anywhere in the world, without paying large sums to gain ownership and also exchange or annual maintenance fees, Mr Google is by far a better option.
For more information regarding this article or assistance in any other timeshare related issues please contact the TCA on 01908 881058 or email: info@TimeshareConsumerAssociation.org.uk