Grace Period Meaning & Definition

What is a grace period?

Grace period is a financial term with multiple meanings. 

A grace period for a loan may be a set time in which you can make a payment beyond your due date without penalty. A credit card grace period, meanwhile, means a period of time when there is no interest charged on your purchases. 

Regardless of loan type, grace periods are designed to benefit borrowers in some way.

Key concept: Your loan or credit card's grace period can help you avoid interest charges and penalty fees.

Grace period: a comprehensive breakdown

When you sign off on a loan or line of credit, it's important to review the details. One thing to note is whether the loan has a grace period. 

Grace periods could allow you to avoid interest or penalty fees, or make no payments to the loan for a set time. Grace periods may be offered with:

• Mortgage loans, including home equity loans and lines of credit (HELOCs)

• Federal and private student loans

• Personal loans or lines of credit

• Business loans

• Credit cards

If the lender extends a grace period, the details should be spelled out in your loan agreement. 

How a grace period works

The type of loan you have usually determines how your grace period works. Here's what you can expect. 

• Mortgages, auto loans, and personal loans. If you have a mortgage, car loan, or personal loan, you may have a certain amount of time after your due date to make a payment without incurring a late fee. 

• Student loans. Federal and private student loans may have a grace period in which no payment is due after you graduate, leave school, or drop below half-time enrollment. Interest may continue to accrue on the loan balance during the grace period. 

• Credit cards. A credit card grace period reflects the time between the end of your billing cycle and your payment due date. You could avoid interest charges on new purchases if you pay your balance in full before the grace period ends. For consumers, if there is a grace period, it must be at least 21 days. 

Benefits of a grace period

Grace periods are usually a good thing from a borrower's perspective. You could take advantage of grace periods to avoid penalty fees and/or credit score damage related to a late payment. 

For example, let's say your mortgage is due on the first of each month but you don't get paid until the 10th. Your loan grace period allows you to make your payment by the 15th without a late fee. That gives you some flexibility to make payments based on your pay periods. 

Credit card grace periods could save you money if you're able to avoid interest charges. If your credit card offers a grace period, as long as you pay off new purchases in full by the payment due date, no interest will accrue. 

Here are a few things to note about credit card grace periods:

• Credit card companies aren't required to offer grace periods, but many do.

• Grace periods usually apply to purchases only, not credit card cash advances or balance transfers. 

• If you don't pay your balance in full by the due date, you could lose your grace period for that month or the next month.