Due to an unprecedented amount of enquiries we are receiving on this subject we thought that an explanation article was necessary. Over the recent years the cost of buying into timeshare has risen with the result that to purchase anything worth having is now costing around £20,000 in Europe. In the USA the figure is not too far different in Dollars.
This statement is not meant to be derogatory in any sense, but the socio demographic of the developers target sales market are those very people who are unlikely to have the required purchase sum in savings. Up until very recently obtaining a loan to purchase timeshare was relatively simple. The big three timeshare lenders being Barclays Partner Finance, Shawbrook Bank and Novuna Personal Finance (formally Hitachi Finance) are all actively involved in providing funds to facilitate purchase. All loans granted are unsecured; this is where the problems begin.
Secured v Unsecured
Simply put, secured lending is where the loan applicant can offer the lender some form of security against default. Normally, secured lending often revolves around the free equity in a domestic property. By way of example, you have a house valued at £100,000 and an outstanding mortgage of £20,000; this means that £80,000 is unencumbered. You could borrow say £20,000 to buy your timeshare and if you default, in the extreme the lender has the right to sell your house to pay off the debt. Colloquially this type of lending would be classified as a remortgage. The major advantage is that the interest rate payable would be more or less the same as a normal mortgage rate.
Unsecured lending means that the lender has no security to foreclose on in the event of default. Unsecured lending is far riskier for a lending company because of this fact and therefore to attempt to minimise the risk the interest rate is extremely high. In examples we have seen, rates of as high as 19% APR are not uncommon.
The normal term for a timeshare loan is 10 years, as we pen this article a check on the current 10 year mortgage rate is 6.07% APR which of course, even factoring in the recent interest rate rise, is far below the 19% or so charged by unsecured.
A question may be;
“Why, if a timeshare has value can’t it be offered as security and therefore the loan becomes secured not unsecured”
The answer to this will be revealed later.
Problems with financing timeshare purchase
Before going into detail it would be good to point out that outside of home purchase, mostly everything else we buy with finance will be of an unsecured nature and therefore will command high interest rates. For many borrowing £500 for a new washing machine or £700 for a new TV are loans that are controllable and affordable but £20,000 for a timeshare, that’s a different matter. At this juncture it would also be worth pointing out that the credit cards you may have in your wallet or purse are an unsecured form of lending, using them will also bring hefty interest rates. At the time of writing the average interest rates on credit card balances is 21.49%.
So apart from the hideously high interest rates, what other problems are there?
The first and most important point is that timeshare has no real intrinsic value, in fact, despite paying £20,000 covered by a loan; the value will have dropped to nearly zero before your holiday has even ended. Another problem is that at a presentation to purchase timeshare lots of figures are bandied around and scant attention is given to a real income and expenditure analysis. At the time a monthly repayment of X seemed to be affordable but when a real affordability check takes place that’s where the problems start. Up until now we have not looked at the most significant problem so we will put that to rights.
Timeshare loans are standalone
We referred to the number of enquiries we are receiving and that a considerable number of enquirers are under the misunderstanding that if the timeshare is terminated the finance is extinguished, 100% incorrect. By way of evidence we show comments received in a recent email from a timeshare owner, the developer has been redacted:
“Reading an article on your website regarding the above company and alarm bells were ringing. We have been trying to leave xxx and have submitted our documents. They have then wanted us to sign to say we take full responsibility for the loan?? We weren’t aware the finance agreement was a 100% loan, we thought like the people in the article it was a direct debit like you’d pay for a gym membership.”
Apart from the misunderstanding demonstrated by this timeshare owner, the email finished with a statement that is both sad and frightening:
“It’s costing us lots of money and with the cost of living increases could potentially threaten our home.”
Loans to purchase timeshare are no different to any other unsecured lending, you borrowed it, you pay it back. A simple analogy would be car purchase, you buy a car with dealer finance (unsecured), you keep the car for a year then sell it, the fact you now don’t have the car doesn’t mean the finance is cancelled.
The advantage of a car is that it has a value which may pay off the outstanding loan or at least reduce it. Timeshare has little or no value. In the example above, if the owner hands back the timeshare to the developer it will not be “purchased” as the developer will not buy it back, in fact in many cases there will be a fee charged to dispose. So what you may have paid £20,000 for becomes worthless literally overnight.
As a point of law, the EU Timeshare Directive of 2008 prohibits timeshare developers and sales staff from either stating or implying any relation to investment, thus confirming that the powers that be in Brussels had figured out for themselves that timeshare is valueless.
TCA Comment
Long before society started to run on credit the old adage used to be; “if you can’t afford it, don’t buy it”. Borrowing upwards of £20,000 to buy nothing more than a promissory note that you can take a number of holidays in the future would seem rather foolhardy. Apart from extortionate interest payments we should also add in the expensive and rising annual maintenance fee, pound to a penny, this was not factored in to the income and expenditure analysis, that is assuming one took place.
The email comments above shows that despite the developer being the “broker” of the loan they still require indemnification that the borrower both repays the loan and absolves the developer. In the real world the developer doesn’t care what future misery they are peddling because they have got their profit, timeshare sold, job done, sales staff commission paid. Speaking of commission, the lender also pays the developer commission for arranging the loan!
On a slightly more positive note, we are aware that a small number of specialist timeshare law firms are making representations to both the Financial Conduct Authority and the Financial Ombudsman Service on the matter of loans to purchase timeshare. Such discussions are in the early stages so no outcome has been given and in all likelihood investigations, if undertaken, may rumble on for some time and although the light is weak there is certainly a glimmer at the end of the tunnel.
Finally a small saving grace is that the developer in our example above will at least allow an exit, unfortunately this is not common practice. More often than not there is no exit strategy so not only is the timeshare owner stuck with finance but also has to pay the ongoing costs of maintenance because they are locked in. Even if an exit is allowed, as we have demonstrated the finance remains in place till repaid in full. If you are experiencing problems with timeshare and/or finance we would like to hear from you. We may not be able to wave a magic wand to solve your entire dilemma but we may be able to help.
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