Rollover refers to the practice of extending a loan term when a borrower can’t repay the agreed upon amount. Rolling over a loan usually involves added fees and interest.
What Is Rollover?
If the borrower can’t pay off the loan balance by the set date, there are two scenarios. The loan either enters default, or it gets “rolled over.” A default means the borrower couldn’t repay the debt. Then, the lender may take certain steps to recover their money. If a loan is rolled over, the due date is extended. This means you have additional time to handle your outstanding balance. No legal action is taken in that case.
However, you can’t roll over all loans. Loans which feature a rollover option are usually short term. A prime example would be a payday loan, which has an initial term of only about 10-35 days.
How Does Rollover Work?
If you can’t repay the entire outstanding balance within the due date, you will be billed a fee and interest. Then, the loan “rolls over.” This means that the repayment period is extended and you enter a new loan term. You then have a new due date by which you need to pay the outstanding balance. The renewed term, loan interest rate and the repayment period are typically the same as they were with the original loan. That being said, it’s important to be careful as terms can differ from the original ones, so you’ll want to check that with your specific lender.
For example, if you request a payday loan with a principal of $500 and a finance charge equal to 20% of the loan amount ($100), then the total due on the loan’s due date will be $600 (the $500 loan amount + the $100 finance charge). If you don’t have the financial ability to repay the loan after the 14-day period is complete, then you can elect to rollover the loan. This means that, on the loan’s due date, you’ll pay only the $100 finance charge. You will rollover the $500 principal for a new 14-day period by agreeing to pay an additional $100 finance charge. The number of rollovers you may complete depends on state laws. In some states, no rollovers are permitted.
What Are The Pros And Cons Of Loan Rollover?
Rolling over a loan can be very useful. If you’ve taken a short-term loan expecting to repay it fully by the due date, but your plans have changed — you will only be charged the interest fee. Then, you can clear the outstanding balance in the new, extended time period.
This is especially useful since rolling over a loan prevents it from going into default. When a loan goes into default, the lender turns to other methods of getting their money back. This can often mean legal action against the borrower. In addition, defaulting on a loan often has negative consequences on the borrower’s credit rating. You can avoid these consequences thanks to rollover.
You should be careful when opting to use this loan feature. Rolling your loan over multiple times can be costly. Each time you renew your loan, you must pay an additional finance charge. Renewing a loan three times, for example, with a finance charge equal to 20% of the loan amount, means that once you have cleared the outstanding balance and paid all finance charges you will have repaid both the principal plus four turns of the finance charge. Thus, you will have paid total finance charges equal to 80% of the loan amount. That is, 20% of the loan amount multiplied by four loans (the original loan plus three rollovers).
Having that in mind, a rollover may sometimes prove to be quite expensive. Still, if used sparingly and only when necessary, it can be very helpful to get you through tough times.
All things considered, a rollover is a convenient way to extend your repayment period. It’s very handy when unexpected situations arise and you can’t clear your outstanding balance until the set date. Still, you’ll want to make sure you are using rollovers responsibly. That way you’ll buy yourself more time and ensure that you don’t pay too much interest.