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.

RELATED TERMS
  1. Grace Period (Credit)

    The number of days between a consumer’s credit card statement ...
  2. Late Fee

    A charge a consumer pays for making a required minimum payment ...
  3. Education Loan

    Money borrowed to finance education or school related expenses. ...
  4. Nonrevolver

    A credit card holder who pays his or her balance in full each ...
  5. Returned Payment Fee

    A charge a credit card company may assess to a customer’s account ...
  6. Adequate Notice

    A written document that specifies in detail the terms and conditions ...
Related Articles
  1. Retirement

    Still Working? Here's How to Invest for Retirement

    Here's how three different portfolios impact your retirement savings while you're still employed.
  2. Personal Finance

    Which Credit Cards Are Best After Bankruptcy?

    Building back credit after bankruptcy generally starts with getting a secured credit card. Here's how to identify the best deals among the limited choices.
  3. Personal Finance

    How To Read Loan And Credit Card Agreements

    The devil is always in the details! Find out what you're signing yourself up for.
  4. Personal Finance

    Get A Free Ride From Credit Companies

    Find out how to make your credit cards work for you - not against you.
  5. Small Business

    Small Business Loan Vs Line of Credit: How They Differ

    Understand the differences between a small business loan and a line of credit, and learn some of the most appropriate uses for each form of financing.
  6. Financial Advisor

    Deal with Your College Debt Using These Steps

    The worst thing to do with college debt is to ignore it. The best way to start tackling it is with a clear roadmap to financial freedom.
  7. Personal Finance

    Time To Consolidate Your Student Loans?

    Use these strategies to decide whether consolidating your student loans makes sense for you – and what to do next if it does.
  8. Taxes

    Debt Consolidation: When It Helps, When It Doesn't

    Here's the smart way to use a debt consolidation to get your financial life back on track
RELATED FAQS
  1. What's the difference between a grace period and a moratorium period?

    Find out what grace periods and moratorium periods are, what you have to do to get them and how they can benefit your financial ... Read Answer >>
  2. What's the difference between a grace period and a run out period?

    Find out what a health flexible spending account is and what a grace period and run-out period are and why they are so important ... Read Answer >>
  3. Do Flexible Spending Accounts (FSAs) expire?

    Learn if Flexible Spending Accounts (FSAs) expire, and the different ways they expire by providing a expiration date, grace ... Read Answer >>
  4. How do secured credit cards help me build my credit score?

    Find out how secured credit cards function and why they can be very useful for those looking to build or rebuild their credit ... Read Answer >>
Trading Center