A:

The major difference between a grace period and a deferment is when a borrower qualifies for each delayed payment option on any given loan. A grace period is a time period automatically granted on a loan where the borrower does not have to pay the issuer any monies toward the loan, and the borrower does not incur any penalties for not paying. Deferments are also time periods where a borrower does not have to pay on a loan, but deferments may require application and proof of financial hardship to be granted by the loan holder. Some deferments are automatic such as when federal student loans are automatically deferred when a student enrolls half-time in a college or university degree program and maintains at least a half-time course load. Others must be proven to the lender with documentation, and the lender can decide to approve or deny the deferment based on the lender's policies or opinion regarding the validity of the deferment request. Since most deferments are not guaranteed, borrowers need to be prepared to pay their loans or risk going into default.

Grace periods are common in installment loans, such as federal student loans, which have a grace period of six months after separation from school and car loans or mortgages which often have a grace period of up to 15 days. During grace periods interest may or may not accrue depending upon the terms of the loan. Subsidized Stafford loans do not accrue interest, while unsubsidized Stafford loans do accrue interest during a grace period. A late payment during a grace period does not result in the borrower defaulting on or having a loan cancelled. Paying during a grace period on student loans lowers the student loan debt quickly. Paying other loans during their grace period means the payment is actually late and results in slightly higher loan amounts due to compounding interest.

In the long term, deferring loan payments has a higher financial impact than paying loans during a grace period. Student loan deferments typically move an entire loan schedule to begin again at the end of the deferment. As with grace periods, subsidized Stafford loans do not accrue interest while unsubsidized Stafford loans do accrue interest during deferment. Although deferments are most common for student loans, both federal and private, for specified, qualifying reasons, other loans may be deferred as well. Mortgages and car loans that have become temporarily unaffordable for the borrower can be modified by the lender to defer all or a portion of the loan for a period of time. A mortgage or car loan deferment usually results in increased payments after the deferment ends or a balloon payment at the end of the original loan term.

Payments may be made during both grace periods and deferment, but are not required. Paying student loans during grace periods and deferments reduces capitalizing and compounding interest scenarios. Paying other loans during deferments also reduces the balloon at the end of those loans.

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