The number one reason our clients hire us at Cancel Timeshare is that they were told they could refinance their timeshare but found the refi process next to impossible. Timeshare loans are known for having extremely high-interest rates, lengthy loan terms, and are difficult to find lenders that are willing to underwrite this specific loan category.
In this short article, we will cover exactly how timeshare lending works, what options you may have to refinance, and what strategies will help you pay less interest.
- Timeshare Lending Explained
- How Timeshare Mortgages Work
- Refinance Options for Timeshares
- Timeshare Loan Calculator
Timeshare Lending Explained
Before filling out loan applications trying to find a refi option, it is important to understand how lending works, and how lenders view debt types. Timeshare loans are unique because they are a specific loan category and are outside the four main types of debt that traditional banking recognizes.
The four main debt categories that every lender understands
- Secured Debt - Collateralized debt. The easiest definition is way to understand this debt type is that if a borrower fails to pay the loan, the lender can liquidate the asset to cover the loan default. A car, boat, or even a house can be repossessed or foreclosed on to cover loan losses.
- Unsecured Debt - This debt type does not require collateral as security. Since no collateral exists, the borrower's credit score is the primary factor used in the approval process. The most common type of unsecured debt is credit card debt.
- Revolving Debt - Revolving debt also referred to as a credit, allows the borrower to continually borrow and repay the amount, then borrow up to the amount again. Credit cards fall into this category again.
- Mortgages - A mortgage is a type of debt that is issued to purchase real estate. It is typically a form of secured debt because the real property is used as collateral. However, mortgages work in a way that is unique to all other debt types and deserve their own classification.
How Timeshare Mortgages Work
Timeshare financing is a unique debt instrument because while it technically is classified as a mortgage, the timeshare property is not considered collateral. A lender would not expect to receive money to cover a loss in the event of a foreclosure (timeshares have little to no resale value). This is where it becomes a little more complicated to refinance and why timeshare loans are classified as unsecured debt.
Remember when you bought your timeshare and had to make a down payment? The reason you had to do so before you could make the purchase was the loan needed collateral. Most timeshare companies today will package thousands of loans together and then sell the debt to investment banks and institutional investors. Smaller timeshare developers may instead opt to get what's called a receivable hypothecation loan. In either scenario, the developer can get a large lump sum upfront for the debt (i.e. get cash for the loan), even though it's financed. However, other than your down payment the loan is largely unsecured.
The easiest way to explain why it's still unsecured debt is with a scenario:
Imagine you buy a $20,000 timeshare and make a 10% deposit of $2,000. The remaining $18,000 is financed. Let's say you never make a single timeshare payment. In this case, you defaulted on the loan but what would the lender get back? Certainly nowhere near the $18,000 outstanding. All that covers their losses is the down payment you made. This is where the complexity of refinancing a timeshare comes in and why it can be nearly impossible for most timeshare borrowers.
Refinance Options for Timeshares
Because of the complexity and risk of this debt type, most traditional lenders will not refinance timeshare loans. However, there are a few non-traditional lenders and traditional loan instruments that can be used to refinance a timeshare. The only downside and limiting factor is you need to have on the higher range of good to excellent credit to do so (most likely at least a 750 or higher).
Another limiting factor is that most people only wish to refinance because of the hefty monthly payments. In theory, if the interest rate is lowered then monthly payments go down, at least that's how the timeshare salesperson pitched it. What's never mentioned is that non-traditional lenders will not offer lower rates on the same loan term.
Non-Traditional Lenders who will refinance timeshares
LightStream by SunTrust Bank, which specializes in non-traditional consumer financing and is the biggest timeshare refinancer, offers timeshare refinancing with the latest offers shown here:
While you could refinance your timeshare here, the drawback is the monthly payment that comes with it. As of 2020, most people who bought a timeshare (Source: American Resort and Development Association) paid an average price of $22,942 with an average loan term of 120 months and an interest rate of about 14%. Assuming these buyers made a 10% down payment, (the industry standard) the loan would breakdown like this:
Amount Financed: $20,647.80
Monthly Payment: $320.59
Total Paid: $38,470.92
Total Interest Paid: $17,823.12
Now let's assume this borrower googled "refinance my timeshare" and came across the LightStream option. Since this is the average buyer, they likely have average to good credit scores. For our example though, we will assume LightStream gives them the best interest rate (reserved for the folks with 800 credit scores). These would be the refi options (again with perfect credit) and limited by the amount being borrowed per LightStream's table above:
"But my timeshare salesperson said my payment would be lowered?" We hear this every day when speaking with potential clients and customers. What the timeshare rep showed you were if the rate dropped and you kept the same loan term. They didn't show you the actual rates or the reduced terms offered. The good news is that there is one way to lower your monthly payment if you own a home with equity and have good to excellent credit.
Using a HELOC to refinance a timeshare
Home Equity Lines of Credit (HELOC) are available when a borrower has equity in their home to use as collateral. You can refinance your timeshare loan by paying off the loan from the timeshare developer with money from a HELOC. The great part about a HELOC is how low the rates are and the flexibility in loan terms. This means you truly could lower your monthly payment and save money on interest at the same time.
The only downside of this scenario is how restrictive banks can be when trying to get this type of loan nowadays. Home values fluctuated wildly in 2008 and lenders are more conservative now when it comes to appraisal value. So it can be tough to try and get a HELOC, even if you have great credit.
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