Rollover Loan Agreement

More information on this topic: Personal Credit Comparison Comparison of Commercial Credits Also known as “rolling risk,” rollover risk is sometimes used interchangeably with refinancing risk. But it is more of a sub-category. Refinancing risk is a more general maturity, which relates to the possibility that a borrower will not be able to replace an existing loan with a new one. Rollover risk focuses on the adverse effects of over-indebtedness or debt refinancing. The terms of the new loan may differ from those of the original loan. Payday loans are a common example of rollover loans, as are rolling mortgages. A rollover loan is a type of loan that is automatically renewed if it is not fully repaid within a pre-defined credit maturity. Instead of being late in payment, as would be the case with other types of loans, the debts are simply transferred to a new loan. The state of the economy is also important. Lenders are often unwilling to extend loans maturing during a financial crisis when collateral assets are declining, particularly when it comes to short-term loans, i.e. their residual life is less than one year. Rollover risk is a risk associated with debt refinancing.

Rollover risk is often accepted by countries and businesses when a loan or other obligation (such as a loan) matures and must be converted into new debts or converts. If interest rates have risen in the meantime, they should refinance their debt at a higher interest rate and, in the future, result in higher interest charges – or pay more interest in the event of bond issuance. This effect has more to do with prevailing economic conditions – in particular changes in interest rates and credit liquidity – than with the borrower`s financial situation. For example, if the U.S. had $1 trillion in debt that it had to implement next year, and interest rates suddenly rose by 2% before the new debts were issued, it would cost the government much more in new interest payments. In early October 2018, the World Bank expressed concern about two Asian nations. “The rollover risks are potentially acute for Indonesia and Thailand, given that their short-term debt outstandings (approximately $50 billion and $63 billion) are considerable,” he said. Rollover risks also existed for derivatives in which futures or option contracts must be “rolled” on later maturities, as short-term contracts mature to maintain their market position. If there are costs or money in this process, that is a risk. With the economy, the nature of the debt can be significant, according to a 2012 article in the Journal of Finance entitled “Rollover Risk and Credit Risk”: it concerns in particular the possibility that a hedging position ends at a loss, which requires a cash payment if the maturing coverage is replaced by a new one. In other words, if a trader wants to hold a futures contract until its maturity and then replace it with a similar new contract, he risks that the new contract costs more than the old one – and pays a premium to widen the position.