The lure of embarking on a luxurious vacation year after year can be mesmerizing, and timeshare offers those who can get away regularly a perfect solution. Many timeshare programs even offer their members the ability to trade, or transfer, their prepaid vacation to other resorts around the world, making the concept of owning a timeshare that much more appealing. Many timeshare owners buy timeshare while on a quick getaway tour, a.k.a. a timeshare presentation, often high on the euphoric sense we get when we are away on vacation. With little time to thoroughly analyze their options, they find themselves committed financially to an investment that may end up plaguing them for years. This article will demonstrate through a simple example why you should consider your options carefully before you borrow money to buy timeshare.

Mr. Jones (a fictitious name) has just sat through a two-hour presentation on the benefits of owning a timeshare. He did this while on a short 2-night stay at the resort, offered to him at well below market prices as a way to encourage him to come visit and check out the program. Of course the sales office knows too well that having Mr. Jones’s wife along will make the decision they make more definitive, so Mrs. Jones is there along side her husband, and both are extremely enthusiastic about the prospect of owning a perfect vacation spot.
The sales person has laid out a couple of payment options for Mr. and Mrs. Jones to consider, one is an all cash deal, but the other allows the new owners to make payments on their new timeshare. The price of the unit is $15,000 U.S. dollars. This is a typical price garnered for the types of units being sold today. Some sell for much more than this, but we’ll stick with this price for example purposes. One of the key selling points of owning timeshare is the assurance that the cost of their deluxe vacation will never increase. The only additional cost the Jones’s will incur will be their annual maintenance fee. This resort management fee is used to cover the cost of maintaining the resort, amongst other things. The maintenance fee for the unit being purchased is currently set at $600 per year and guaranteed not to increase any more than the rate of inflation.
This is great! The Jones’s are going to pay $15,000 now and will only have to pay $600 per year for their actual vacation.

Since the sales person has assured the Jones’s that their initial investment is a sound real estate transaction, there is no consideration of their initial down payment ever losing value. So the only thing the Jones’s are concerned with is their annual maintenance fee.

What if the Jones’s decide, however, to borrow the money to pay for the $15,000.00 down payment? As the saying goes, “The Devil is in the details”. At 7% interest (a very attractive rate for this type of loan), the monthly payment on their down payment, assuming the loan is amortized over 30 years, would be approximately $100 per month. The Jones’s feel very comfortable making this payment. The problem is they haven’t looked closely enough at what this payment really implies. The Jones’s are only buying one week of vacation, albeit at a very luxurious resort. The $100 monthly payment really only applies to one week per year, so the cost of that week must reflect all twelve months of payments. This means that the week that the Jones’s are buying will now cost them the $600 maintenance fee plus $1200 in principal and interest on their down payment. To be absolutely fair, the interest in each payment, assuming a simple interest loan, is $58 per month or $696 per year (the interest in each payment is the real “expense” in this equation). So the week that the Jones’s are buying will actually cost them, excluding any "principal”, $1296. At $600 per week, this vacation looked like a very attractive proposition. However, if the Jones’s stop to think about what the real cost of their week will be if borrowing the money for their down payment, you can bet they will more than likely give some serious thought to other ways to deal with this purchase.

We all depend on our investments to yield a positive return, including real estate, so the prospect of paying interest on real estate is a reasonable expectation. Show me a single timeshare resort, however, whose value has actually gone up, resulting in the original purchaser showing a gain on their sale. It rarely, if ever, happens; timeshare does not appreciate no matter what the sales person tells you. Why? Because resort developers expend up to 50% of the cost of each unit they sell in advertising costs, and these expenses are all re-captured in the price of the original sale. This gives rise to over inflated prices and valuations of new timeshare sales. The Jones’s dilemma compounds itself with the fact that the principal that is being contributed with each payment (approximately $42 per month), may be going into an investment that will never yield a positive return and will most likely loose value. Results from sales of timeshare in the resale market clearly demonstrate that most are sold far below the original purchase price. The decline in value will have a double negative impact on the Jones's.

First, their equity is not building as it should with each payment, merely by the fact that it simply wasn't worth what they spent to begin with. Second, should the resale value of their timeshare fall below the amount owed on their loan, the Jones's could face being "upside down" on their loan, i.e. they owe more than it's worth, and more than they can sell it for. So even if they are able to muster a sale of their unit, they may still end up with payments on a personal loan and have nothing to show for it. If the Jones’s decide they really want to buy timeshare, they have a lot to consider with regards to their investment, not just in terms of preserving their principal, but also in terms of what each week-long vacation is going to cost them. They must carefully consider the impact of borrowing money for this purpose.

It is clear that without careful analysis, many vacationers can find themselves paying a lot more for their timeshare than they bargained. Many vacationers are swept up in the excitement of the moment, but the unfortunate truth of the matter is, when they get home and the bills show up at the door, it will be too late to reconsider.