by Gary Foreman

Dear Dollar Stretcher,
My husband and I are currently in a bind because we purchased a timeshare a year ago and are making payments of about $190 a month for the next ten years. At the time we thought that we could afford it and now we realize we can't. What do I do? I have spoken to the sales office and they tell me that the only thing we can do is get a personal loan for the $22,800 to pay it off and then try and sell. With our credit rating we don't have a prayer of getting a personal loan for that amount. Please help.
Jackie R.

Dear Dollar Stretcher,
Do you think timeshares are a good investment? I can purchase a timeshare in Aruba, 1 week a year forever. I can will it or sell it as I please. It costs $5000 U.S. The maintenance fees are $189 US per year. If I want to travel to a different place I pay an $89 transfer fee. This gives me a studio apartment in Aruba for one week each year. If I don't use it one year I can use it for two weeks the next year. Let me know what you think.

Cool blue waters in an inviting swimming pool. That's a picture that every good timeshare salesperson can paint at will. Just sign here. And lots of people do. According to KPMG, timeshares are a multi-billion dollar a year business. But, as Jackie's letter demonstrates, sometimes you buy more than fun in the sun. By considering her options on how to get out from under, we'll learn a lot about whether Helen should go through with her purchase.

Let's begin by defining what a timeshare is. Also called 'interval ownership', it's a method that allows you to buy the rights to a condo for just one specific week of the year. You'll be expected to pay an annual maintenance fee and any interest charges if you finance your purchase.

Salespeople justify the purchase based on a formula that compares 'equivalent' hotel rates. They start with a hotel rate (say $150/day). Then subtract the daily maintenance that most timeshares charge ($40/day or so). Supposedly, that works out to a savings of $110 per day or $770 per year. The claim is that in ten years you'll have saved $7,700 or enough to pay for the timeshare. But, who (besides the salesperson) says that the only way to take this type of vacation is to stay at the hotel for $150 per day?

Turn to Jackie's timeshare. Her payment seems awfully high. She didn't say how much her unit cost, but based on ten years worth of payments of $190 a month, she could be financing about $11,750 at 15% interest. Obviously, that's just an estimate, but she probably got a pretty nice unit.

What are her options? The first is to just continue making payments. Perhaps if she cuts back in other areas she'll be able to keep up with the payments.

The second choice is to try to sell the unit. For a studio apartment with a week during the 'low' or off season you might get $2,500. On the other end, a two bedroom during 'high season' could bring in the $10,000 range. Auctions are also available, but tend to bring even less. She could expect to get more for if the timeshare is in one of the best resorts in the best areas.

We checked out some sites offering timeshare resales on the internet. There were a variety for sale although only a few selling sites. Just as an example we found a one bedroom available in the winter months outside Palm Springs, CA for $4,500. She can check out comparable units. It's probably safe to say that Jackie will have trouble selling the unit for what she still owes on it.

Another option would be to rent the unit out to help cover the payments. Rentals typically run between one and two times the annual maintenance fee. For a higher end unit like Jackie's that could bring in $750 or so each year. But unless she arranges it herself, she can expect to pay a commission of between 20% to 50% of the rental fee to the renting agent. And then she won't have the week to use for her family.

Defaulting on the loan is another choice. Jackie will need to check the loan agreement to make sure that the lender can only repossess the timeshare and doesn't have access to her other assets. A default would show on her credit history. Generally this isn't a road that you want to follow, but it is an option.

Finally, she could contact the lender and explain the situation. If the mortgage company is faced with the choice of renegotiation or foreclosure, they might make an adjustment in the mortgage rate. It's not very likely, but it doesn't cost much to try and could pay big benefits. Altogether, Jackie's options aren't too good. Frankly, she passed up the best choice when she didn't tell the salesperson "no".

Now let's see if we can't give Helen some help. She's considering a less expensive timeshare. But, that week will still cost her about $489 per year. We arrive at that by adding the interest she could earn on the $5,000 purchase price ($300 at 6%) to the annual maintenance of $189.

We checked online to see what other units were available for resale in Aruba. We realize that we're not comparing the exact week in the same resort, so the comparison isn't perfect. But we found a couple of studio units for sale. One went for $4,500 with a $285 annual maintenance fee.

We also found some rentals. Didn't find any studios, but there was a listing for a two bedroom unit for $850. Could Helen find something in the $500 range? Probably. And then she'd have the luxury of selecting a bigger unit or a different week if her needs change.

The main issue with timeshares is that very few of us can see ten years into the future. We get married or divorced. We have children, move, get sick and change jobs. All of these things change what we do with our vacations. It affects where we go, when we go and how much space we need when we get there. And unfortunately, although timeshares give you some room to trade and swap, often you need more flexibility than you have.

Updated August 2013

Gary Foreman

Gary Foreman is a former financial planner and purchasing manager who founded The Dollar Stretcher.com website and newsletters in 1996. He's the author of How to Conquer Debt No Matter How Much You Have and he's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com. Gary shares his philosophy of money here. Gary is available for audio, video or print interviews. For more info see his media page.

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