What is the 'Grace Period'

A grace period is the provision in most loan and insurance contracts that allows payment to be received for a certain period of time after the actual due date. During this period, no late fees are charged, and the late payment does not result in default or cancellation of the loan. A typical grace period is 15 days.

BREAKING DOWN 'Grace Period'

A grace period is usually the only feature of a loan on which interest is calculated monthly, if it is calculated at all. Under some loan contracts, payments outstanding during grace periods are interest free, but the majority have interest compounding during the grace period. Borrowers should check their loan contract for the specifics on any grace periods. Credit cards, for which interest is calculated daily, may not have any grace periods.

The grace period is generally applied to two scenarios in regards to credit. The first involves a specified amount of time beyond the noted due date when a borrower can make a required payment without incurring a penalty for a late payment. The second covers any period of time where interest is not charged on new purchases.

Example of a Grace Period

When the grace period relates to late payments, if a borrower has a due date on the fifth of every month, and the lender has provided a five-day grace period, the borrower can make a payment as late as the 10th of the month and not incur any penalties associated with a late payment.

Alternatively, if the grace period refers to a period of time when new charges do not incur interest, a common example is the provisions set forth in the Credit Card Act of 2009, which requires all credit card issuers to provide at least 21 days for the borrower to repay the aforementioned charge without incurring any interest charges specifically attributed to the purchase. It is important to note these provisions do not necessarily apply to cash advances or balance transfers, the details of which can be reviewed in the cardholder’s credit card agreement.

Late Payment Penalties

Penalties for a late payment can vary. The details surrounding a particular lender’s late payment policy must be provided to the borrower as part of the lending process. Some examples of late payment penalties can include a late payment fee, a penalty interest rate hike or cancellation of the line of credit. In cases where an asset is pledged as collateral, multiple missing payments can result in seizure of the asset by the financial institution.

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