Refinancing risk

Okay kiddo, so let's say you have a piggy bank that you put your allowance money in every week. One day, you decide to lend some of your allowance money to your friend, but you want to make sure you get it back with interest (extra money). So, you make a deal with your friend that they will have to pay you back the money you lent them plus a little extra in two weeks.

Now, imagine that after one week, you realize that you need some of the money back from your friend because you really want a toy that is on sale. But your friend isn't able to pay you back yet because they don't have enough money. This makes you worried about whether you will be able to get your money back on time because you need it for something else.

This kind of worry is called "refinancing risk" in grown-up terms. Refinancing risk is when someone lends money to someone else with the expectation that they will get their money back with extra money (interest) at a certain time, but then the borrower isn't able to pay back the money on time. This can cause problems for the lender because they were expecting to get their money back and now they may not be able to use it for the things they need it for.

In grown-up world, banks and companies can also face refinancing risk when they borrow money from other people or institutions. If they aren't able to pay back the money they borrowed on time, they may have to pay extra fees or higher interest rates, which can affect their ability to do other important things with their money.