The major difference between a grace period and a deferment is when a borrower qualifies for each delayed payment option on a given loan. A grace period is a time period automatically granted on a loan during which 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.

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.

Key Takeaways

  • Both grace periods and deferments are periods of time during which a borrower does not have to pay a lender money toward a loan.
  • Grace periods tend to be built into loan terms, whereas most deferments require application and documentation.
  • Deferring loan payments does not generally stop interest from accumulating, so it can be quite impactful on the loan interest owed, depending on the loan's terms.

Grace Period

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 both often have a grace period of up to 15 days.

During grace periods, interest may or may not accrue, depending upon the loan's terms. Federally subsidized Stafford loans do not accrue interest, while unsubsidized Stafford loans do accrue interest during their grace periods.

A late payment during a grace period does not result in the borrower defaulting on or having a loan canceled. Paying during a grace period on student loans lowers the student loan debt quickly. Paying some other loans during their grace period means the payment is actually late and results in slightly higher loan amounts due to compounding interest.

Deferment

Deferments are also time periods during which borrowers do not have to pay on loans, but deferments most often require an application and proof of financial hardship before the loan holder may grant them. Some deferments are automatic, such as in the case of federal student loans, which are automatically deferred when students enroll at least half-time in a college or university degree program and maintain at least a half-time course load. 

Other types of deferments need also 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.

Special Considerations

In the long term, deferring loan payments can have a more significant 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.