A rollover loan is essentially a loan that gets renewed at a defined point, as stipulated in a loan contract. There are several types of rollovers, each different from the others except for this principal idea of renewal. The most common types include payday loans, rollover IRA or other retirement savings loans, and rollover mortgages. Another kind of loan that may earn this title is the automobile loan, if someone buys a new car and seeks financing to pay off their trade-in car at the same time.
The payday rollover loan begins as a short-term loan that is renewed every few weeks, coinciding with paycheck arrival, if the full amount of the loan is not paid. These rollovers are incredibly costly, and can quickly add hundreds of extra dollars to the cost of repaying a loan. What occurs is the lender charges a new large fee with each two weeks that pass and each loan renewal, so that it becomes much expensive to repay the loan.
What is basically happening is that the loan is renegotiated automatically every two weeks, and a fee applies to taking out a new loan, since the money is considered paid and then re-borrowed each time. Given these additional fees, this form of rollover loan is not considered a good investment. People intending to use these loans should inquire about fees for each rollover and plan to pay off money swiftly.
A rollover IRA loan or pension plan loan is another example of rollover loans. Typically, this loan occurs if someone has already borrowed from their pension plan and then begins work at a different job. In these cases, loan renewal occurs and new terms of repayment apply in the new job.
Somewhat different than this is a rollover loan based on a mortgage. The initial terms of the mortgage expire at a set point and the loan is renegotiated at the going rate. This could be advantageous or not, depending upon whether interest rates are higher or lower than they were when the initial loan was taken.
Another kind of the rollover loan is when people take debt and roll it into a new loan such as in auto loans. Lots of people owe more money on their cars than they get if they sell a car, especially to a dealer. Instead of waiting to pay down the loan more, they may choose to take the rest of the money owed and add it to the money they’ll borrow for a new car.
This increases payment and purchase price, but it does effectively release the person from current loan obligations. From an economic standpoint, it’s certainly better to wait until the loan payment price is equal to present car value, because rolling over the money into a new loan means paying much more interest on it. Some people who have circumstances where they can’t afford to wait may find that an auto rollover loan is useful.