Rollover

Rollover
To “Rollover” a loan means to extend the loan’s due date by paying an additional fee. Loan rollover is most common with short-term payday and title loans, and is the way that some borrowers become trapped in a cycle of debt.

What is a Rollover?

The term “Rollover” refers to the practice of “rolling over” a loan, wherein the borrower pays the lender an additional fee in order to extend the loan’s due date.1 This additional fee increases the cost of borrowing, and can lead some borrowers to become trapped in a cycle of debt, also known as a “debt trap.” Loan rollover is most commonly seen in short-term loans like payday and title loans. The practice is banned in 21 states.

While the particulars of loan rollover might vary from state to state and from lender to lender, there all have two elements in common.

  1. The customer pays a fee.

  2. The lender extends the loan’s due date.

Rollover is common with short-term loans like payday loans, which average 14 days in length, and title loans, which average a month in length. These loans are often structured with a flat interest which means that the percentage of that principal loan amount that is charged in interest (for example: a 15 percent rate on a $100 equals a $15 interest charge), does not change over the life of the loan. A customer who pays back the loan early pays the same amount as a customer who pays back the loan on the due date.

(To read about amortizing loans that accrue interest over time, check out the OppLoans Financial Resources entry for amortization.)

These short-term loans rarely come with installment payments. The loan is designed to be paid back in full—principal and interest—on the day the loan is due. As these loans are often aimed at customers who have low incomes and bad credit, some customers are unable to pay off the loan in full in such a short period of time. In these circumstances, the lender might give the customer the option of rolling the loan over.

The most common form of rollover sees the borrower paying back only the interest that is owed on the loan. The lender then extends the loan’s due date and charges the borrower additional interest, which increases the cost of borrowing.

How does Rollover increase the cost of borrowing?

When a lender rolls over a short-term loan, the new interest charge is added on top of the interest that the borrower was already charged. This increases the cost of borrowing.

Here’s an example:

A $300, 14-day payday loan comes with a 15 percent interest charge, which means that the borrower owes the lender $45 in interest and $345 in total. Two weeks later, the borrower is unable to pay the loan back in full. In order to roll the loan over, they pay the lender $45 and receive an additional two weeks to pay the loan back. The lender charges the borrower an additional 15 percent, or $15, on this new two-week term. If the borrower then paid the loan off in full after this second 14-day term, they would have paid $90 on a $300 loan, or 30 percent interest. If they rolled the loan over a second time, and paid an additional $45 before paying the loan off in full, they would have paid a total of 45 percent in interest.

Every time a loan is rolled over, the cost of borrowing increases. This is why short-term payday loans often have annual percentage rates (APRs) around 300 percent, and sometimes much higher. A 14-day payday loan with a 15 percent interest rate would have an APR of 390%.

How does Rollover lead to a cycle of debt?

The tem “cycle of debt” describes a situation where a person cannot afford to pay off their debts, and is constantly having to either extend the loan’s due date in return for an additional fee or take out a new loan in order to pay the original loan off, which is referred to as “reborrowing.”

This is very similar to the practice of loan rollover. Borrowers pay a new interest fee in order to get an extension on their loan, which then increases the cost of borrowing. As they have difficulty saving up enough many to pay off their loan in full, they are continually extending the loan, paying more and more in interest without ever getting any closer to paying the loan off.

A 2013 report from the Consumer Financial Protection Bureau (CFPB), found that the average payday loan borrower has 10 payday loan transactions per year.2 A CFPB report from 2014 found that 80 percent of payday loans were the result of rollover or reborrowing.3 These findings point to a pattern of indebtedness with payday loan customers, a pattern in which the practice of rollover undoubtedly plays a role.

Because of this, loan rollover is currently banned in 20 states.

In what states is Rollover Banned

Rollover is increasingly being recognized as a predatory and dangerous practice. Because of this, many state and local governments have—or are considering—outlawing rollover altogether.

Currently, rollover is banned in the following states:

In some states, rollover is permitted but restricted. For example, payday loan borrowers in Wisconsin are allowed to rollover their loans only once.

What’s the difference between Rollover and Refinancing?

Rollover is generally associated with predatory payday and title loan products. Refinancing is generally associated with loans in which the principal is either higher, or the term longer, or both; such as a mortgage, auto loan, or installment loan.

While rollover typically means securing a new loan from your same lender to pay for a previous loan, refinancing is different in that it can often be used to secure more favorable rates and is often done when the borrower’s financial situation has improved since they took out the original loan.

As with rollover, the laws governing refinancing vary from state to state.4

References

  1. “What does it mean to renew or roll over a payday loan?” Consumer Financial Protection Bureau. Accessed February 2, 2016. http://www.consumerfinance.gov/askcfpb/1573/what-does-it-mean-renew-or-roll-over-payday-loan.html
  2. “Payday Loans and Deposit Advance Products: A White Paper of Initial Data Findings.” (2013, April 24) Retrieved May 26, 2016 from https://s3.amazonaws.com/files.consumerfinance.gov/f/201304_cfpb_payday-dap-whitepaper.pdf
  3. “CFPB Data Point: Payday Lending” (2014, March 25) Retrieved January 27, 2017 from https://s3.amazonaws.com/files.consumerfinance.gov/f/201403_cfpb_report_payday-lending.pdf
  4. Bauhaus, Jean Marie. “Can I Renew or Refinance a Payday Loan If I Cannot Pay It Back?” The Nest. Accessed January 25, 2017 from http://budgeting.thenest.com/can-renew-refinance-payday-loan-cannot-pay-back-33703.html