Grace Period

Financial Dictionary -> Loans -> Grace Period

When taking out an insurance policy, a loan or another form of credit it is agreed that the borrower should make repayments periodically, however due to unforeseen circumstances the borrower may get behind with a payment. It's not practical to null the agreement and claim a borrower defaulted when they miss one payment, and thus negotiations can go on for months before any further action is taken.

The grace period is simply the extra time beyond the payment date that a lender may give a borrower to make a payment on their loan. Before taking any further action or imposing penalties.

Grace periods are not exclusive to loans, and are often used for bills and subscriptions where regular recurring payments are made. You may be granted an extra three or four days after the payment is due before disruption of service or late penalties. The usual procedure if a payment is late is a simple written reminder with an enclosed bill.

The term grace period may also apply to a period of time where you do not have to pay for an item or credit. For example a car dealership may promote an offer where you don't have to pay for the first 3 months. They might call this a grace period. In a similar fashion credit card companies may promote a grace period in which they do not charge interest, aka, interest free credit.