Grace Period Meaning Definition How Does It Work

Grace Period Meaning

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How Does it Work?

Financial institutions offer credit in any form except the debtor to pay the agreed sum based on the arrangement between the creditor and the debtor. In some cases, the creditor does not penalize the debtorDebtorA debtor is a borrower who is liable to pay a certain sum to a credit supplier such as a bank, credit card company or goods supplier. The borrower could be an individual like a home loan seeker or a corporate body borrowing funds for business expansion. read more for not making the payment by the deadline. They can then make the price later without extra charges using the grace period.

Key Takeaways

A grace period is the extra number of days given after the due date to undertake the unfulfilled obligation without suffering any extra charges.It comes with different features. As such, debtors should understand their terms before taking mortgages, student loans, credit cards, and other credit lines. For example, it is offered for two weeks to a month in the case of credit cards.They come in handy when an unforeseen occurrence hinders the timely payment.

The duration in which the debtor can enjoy this privilege depends on the agreement between the financial institutionFinancial InstitutionFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. read more and the borrower. This gives the debtor more time to come up with the funds and make the payment without incurring an additional charge till the grace period has not lapsed. Upon the lapse, the owed amount is subjected to penalties such as interest and cumulative fees.

They are sometimes offered as an introductory perk to new clients who sign up for a financial service. However, since different grace periods have different features, debtors should understand their terms before taking mortgages, credit cards, and other credit lines. Important ones include:

Ramifications of not paying the debt when it lapses.The factors that could lead to its cancellation.How making partial payments will affect it.Any hidden costs associated with it.

Grace Period in Mortgage

Mortgage products usually require payments to be made on specific dates. If the whole amount is not paid, the borrower usually has to incur a penalty. Many firms provide a grace extension of several days to protect them from this. For instance, a two-week grace period gives the borrower the flexibility to make the payment up to two weeks after the due date without incurring any penalties.

The late payment penalties start accruing on the outstanding amount when it lapses. Customers can benefit from such a facility, particularly in tough economic times. It gives them extra time to come up with the payment without ruining their credit scores.

Grace Period in Insurance

Insurance is important in many facets of life and can come in many forms. For example, car insurance, life insurance and assurance, professional indemnity insurance, and others grant peace of mind to an individual.

Paying insurance premiums on time ensures that the insured has the confidence to know that they would not have trouble finding the necessary money if something goes wrong. However, insurance companies offer a grace period to clients if they fail to pay the premium. Normally, it covers the number of days the policy gets inactive upon a failure to make the premium payment.

Grace Period in Credit Cards

Credit cards have become popular, and this popularity only increases with time. However, when one uses a credit card, they are typically expected to make the payments at the end of the month. Therefore, having an allowance past the expected payment date serves as a cushion for irregularly receiving salaries or wages.

Credit cards usually offer grace periods of two weeks or even a month. In addition, some credit card companies can offer permanent facilities where the customer is allowed extra days (such as a month) to make the payment. When the grace extension lapses, the owed amount is subjected to penalties such as interest and cumulative fees.

Grace Period on Student’s Loan

Many studies have pointed time and again that many people owe student loans. Moreover, they represent many of all individual debt types in the United States and other countries.

Normally, the federal student loan offers a grace period of six months after graduating or discontinuing education. For private loans, the period varies as per the terms of the loan.

Is It Bad to Use Grace Period?

The prime focus has to be on the timely fulfillment of the obligation. However, grace periods come as a respite at the time of unforeseen occurrences like receiving a late salary, job loss, or acute health conditions.

Also, the utility of this service depends on how one uses it. In nearly all cases, it is considered a good thing. It provides a borrower more time to organize their finances and fulfill their debt obligations.

The most useful of these is the recurrent one, rather than a one-time offer to attract customers. Sometimes, they are offered every month to provide a financial cushion if the unexpected happens. Therefore, when seeking credit facilitiesCredit FacilitiesCredit Facility is a pre-approved bank loan facility to businesses allowing them to borrow the capital amount as & when needed for their long-term/short-term requirements without having to re-apply for a loan each time. read more of any kind, it is wise to seek those that come with grace extension.