Definition and Example of Grace Period
A grace period is the specified time you have to meet a financial obligation, such as a credit card payment or mortgage, after the due date has passed, while avoiding few or no penalties. Grace periods vary in length and depend on the creditor or lender, as well as the type of debt.
How Grace Period Works
A grace period is the specified time you have to meet a financial obligation. With credit cards, for example, the grace period is the time between the end of the billing cycle and the payment due date. If the financial debt you owe is paid during the grace period, penalties such as late fees and their impacts on your credit report will be waived.
Loans with grace periods may impose other penalties in addition to late fees. Your interest rate may increase, the creditor may seize your collateral (if you have a secured loan like a mortgage or car loan), or your credit rating may be affected.
Note: Since many creditors can report late payments to credit bureaus 30 days (or sometimes even 60 days) after they are due, it is advisable to make payments before the 30-day period ends. Otherwise, your credit rating may be affected.
Types of Grace Periods
As mentioned, grace periods vary based on the debt you have and the creditor or lender you are dealing with. Here is a brief overview of the various grace periods you might encounter:
Mortgage Grace Periods
For mortgages, grace periods are typically around 15 days from the payment’s due date. If your mortgage payment is due on the 15th of each month, for example, you must make the payment by the 30th or you will have to pay a late fee. Late fees for mortgages typically range from 3% to 6% of the monthly payment amount, depending on the state you reside in and the lender.
Note: For mortgage loans, if you switch to a new servicer, you have a 60-day grace period, which means late fees cannot be charged during this timeframe.
Car Loan Grace Periods
Regarding car loans, grace periods vary by creditor, but in most cases, lenders offer a 10-day grace period. If you do not pay your car payment 10 days after it is due, you are likely to incur a late fee. Depending on the lender, if you fail to pay the next installment and it is assumed that you cannot repay the loan, your vehicle may be repossessed.
Credit Card Grace Periods
As mentioned, the grace period on your credit card is typically the time between the end of the billing cycle and the payment due date. Unlike mortgage grace periods, credit card grace periods generally provide time to pay off your full balance without interest accruing.
If your credit card company gives you a grace period and you have no balance, you can avoid paying interest on new purchases if you pay your full balance by the due date. However, if you do not pay the full balance by the due date, interest will be charged on the unpaid portion of the balance.
Note: Since credit card issuers must mail the bill within 21 days of the due date, you will know the amount due for the billing period for at least 21 days.
Student Loan Grace Periods
If you have a federal student loan, the grace period is the time after you graduate, leave school, or drop below half-time enrollment before you must begin repayment. In most cases, the grace period lasts six months. However, sometimes it may be as long as nine months.
From
It is important to note that not all federal student loans have a grace period, so make sure to understand the details of your specific loan. For example, PLUS loans do not provide a grace period.
Health Insurance Grace Periods
The health insurance grace period is typically 90 days after the monthly premium due date. If you miss the original payment, you can make it up during the grace period. This will prevent you from losing your health coverage.
The 90-day grace period applies if you have a marketplace insurance plan and are eligible for advanced premium tax credits, or if you have paid at least one month’s premium during the benefit year. If you are not eligible for advanced premium tax credits, the grace period may be different. Contact your state’s insurance department to find out what it is.
Takeaway
A grace period refers to the time during which payments can be accepted after the actual due date or deadline, without incurring penalties. There are different types of grace periods, including those for mortgages, auto loans, credit cards, student loans, and health insurance. Penalties for making a payment after the grace period can include late fees, higher interest rates, lien on collateral, and damage to your credit score.
Source: https://www.thebalancemoney.com/what-is-a-grace-period-5208660
Leave a Reply