Dictionary of Banking Terms: over-extension
over-extension
- Banking.A loan balance or total credit obligation beyond the borrower's ability to pay. In situations where the borrower has taken on more credit than he can handle, a debt consolidation loan (combining several obligations in a single loan repayable over a longer term) may be the only alternative to bankruptcy. As a rule of thumb, borrowers who pay more than one-third of their net income to repayment of consumer debt, excluding mortgage debt, may be over-extended in their ability to repay recurring household debt.
- Securities.A trader's purchase of securities above his capital and borrowing power. This situation could lead to losses in a declining market if the trader is unable to meet margin calls.
