Overextension

DEFINITION of 'Overextension'

A loan or extension of credit that is larger than what the borrower can repay. Overextensions can require the borrower to consolidate his or her debts into a single loan. Consumers who must use more than a third of their net income to repay debt other than their mortgage are generally considered to be overextended.

BREAKING DOWN 'Overextension'

For securities traders and investors, overextension represents leverage in excess of his or her account equity and buying power. This can greatly amplify losses in a bear market and force the trader to meet steep margin calls. Inability to do this can result in forced liquidation of securities and the freezing of the account.

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