OppLoans Word of the Week: Rollover
If you’re shopping around for quick loans that can get you through to your next payday, be sure to read all the fine print. Not only do most of these fast cash loans come with high annual interest rates, they also require lightning-fast turnaround. In fact, the typical repayment term for a payday loan is only 14 days. Take a second and ask yourself: If you owed a lender $500 or more, would you really be able to pay that back in only two weeks?
Most payday loan borrowers can’t. That’s why they roll their loan over.
What is Rollover?
With short-term, same-day loans, the practice of rollover is extremely common. It’s basically an agreement between the lender and the borrower: The lender extends the due date on the loan so that the borrower gets more time to repay, BUT the borrower must pay additional interest charges.
Here’s an example of how it might work …
Brian takes out a $300, 14-day payday loan that costs $15 per $100 borrowed, or $45 total. Two weeks later, Brian can’t afford to pay off the $345 he owes. Instead, he pays the $45 he owes in interest and rolls the loan over. He gets an additional two weeks to pay the loan off, but will also have to pay an additional $45. By rolling over the loan once, Brian has effectively doubled the cost of borrowing from 15 percent to 30 percent.
Why is Loan Rollover Dangerous?
Every time a person rolls a loan over, they are increasing their cost of borrowing. Payday and title lenders know this, which is why they often encourage people to roll their loans over as much as possible. Most short-term loans are designed to be repaid in a single, lump-sum payment, which makes them even more difficult to repay.
Loan rollover can all too easily lead borrowers into a debt trap. As they continue to roll their loans over and over again, borrowers do not get any closer towards actually paying the loan off. Each payment they make goes only towards the interest, not the principal loan amount. This arrangement is very profitable for lenders, but it is pretty terrible for borrowers.
Read more about Financial Terms Glossary.
Last week’s entry: Annual Percentage Rate (APR)
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