What is a Roll-Over Loan?
A roll-over loan is a practice which gives the borrower the option to renew a loan on the date that it becomes due, without actually repaying the loan, i.e. a new loan agreement is begun, while the previous one remains active and unpaid.
This practice results in the original capital amount, or an increased capital amount, being rolled over from one month to the next, and at the same time earning interest at the annual rate instead of the defaulting loan earning 5 percent maximum interest per month as prescribed by NAMFISA guidelines.
Thus a new agreement is entered into for a loan that is effectively in default.
What is NAMFISA’s take on roll-over loans?
NAMFISA allows limited numbers of loan rollovers, however:
NAMFISA discourages the perpetual roll-over of loans;
• Loan roll-overs are limited to a maximum of four months;
• After the fourth roll-over, the loan agreement should be ended and the lender and borrower should negotiate the repayment terms of the balance outstanding at that date with no further interest being charged.
• Loan roll-overs are limited to a maximum of four months;
• After the fourth roll-over, the loan agreement should be ended and the lender and borrower should negotiate the repayment terms of the balance outstanding at that date with no further interest being charged.
Conclusion
How Does a Roll-Over Loan Work?
While NAMFISA permits roll-over loans, there are strict guidelines:
- Limited to 4 months: A loan can only be rolled over for a maximum of 4 months.
- After the fourth roll-over: The loan agreement must be terminated.
The lender and borrower must negotiate repayment terms without any additional interest.
- Limited to 4 months: A loan can only be rolled over for a maximum of 4 months.
- After the fourth roll-over: The loan agreement must be terminated.
The lender and borrower must negotiate repayment terms without any additional interest.
Roll-over loans are intended to provide short-term relief, but continuous roll-overs can lead to unmanageable debt for borrowers. Understanding these guidelines is crucial to ensure both lenders and borrowers are on the same page.