# Understanding Grace Periods: Key Examples for Borrowers

## What Is a Grace Period?

A grace period is a designated timespan following a payment due date, allowing borrowers to make payments without incurring penalties. Commonly featured in mortgage and insurance contracts, grace periods typically last about 15 days, enabling consumers to avoid negative impacts. These periods serve as a buffer against late fees and potential credit report marks, though specifics vary by contract.

### Key Takeaways

*   A grace period is the time after a payment due date during which no penalties are imposed.
*   Mortgage loans often include a grace period, allowing borrowers to make payments without penalties within a specified timeline.
*   Credit card grace periods are primarily for new purchases, providing time to pay without incurring interest.
*   Grace periods differ from deferments, where payments are paused due to hardship, often requiring lender approval.
*   Contracts detail the consequences if payments are not made by the grace period's end, such as late fees or penalty interest rates.

![Grace Period: A set amount of time a payment can be delayed without a penalty being imposed.](https://www.investopedia.com/thmb/C1HXwe9i9HdV45qEWIvTwrvtPro=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Grace_period_final-37bbdc088f8249c4a419d70f0af79e39.png)

*— Investopedia / Michela Buttignol*

## Understanding Grace Periods: How They Function in Borrowing

A grace period [allows a borrower or insurance customer to delay payment](https://www.investopedia.com/ask/answers/111314/whats-difference-between-grace-period-and-deferment.asp) for a short period of time beyond the due date. During this period, no late fees are charged, and the delay cannot result in default or cancellation of the loan or contract.

In most cases, payment after the due date but during the grace period does not cause a black mark to be added to the borrower's [credit report](https://www.investopedia.com/terms/c/creditreport.asp).

However, it's important to check the contract for the specifics on the grace period. Under some loan contracts, no additional interest is charged during the grace period, but the majority add [compound interest](https://www.investopedia.com/terms/c/compoundinterest.asp) during the grace period.

When defining a grace period on a loan, it is important to note that credit cards do not have grace periods for their monthly minimum payments. A penalty for late payment is added immediately after the due date, and interest continues to be compounded daily.

> **Important**
>
> A payment after the due date but during the grace period generally does not cause a black mark on the borrower's credit report.

However, the term grace period is used to describe one scenario in consumer credit: A period of time before which interest may be charged on new purchases on a credit card is called a grace period. This grace period of 21 days [is meant to protect consumers](https://www.investopedia.com/articles/pf/07/credit-card-donts.asp) from being charged interest on a purchase before the monthly payment is due.

## Real-Life Examples of Grace Periods

If a consumer has a mortgage with a due date on the fifth of every month—and the contract has provided a five-day grace period—the payment can be received as late as the 10th of the month without the borrower incurring any penalties. This is an example of a loan grace period in a mortgage loan.

The grace period for credit card purchases is a newer phenomenon and was established with the [Credit Card Act of 2009](https://www.investopedia.com/terms/c/credit-card-accountability-responsibility-and-disclosure-act-of-2009.asp). Before that consumer protection law went into effect, some lenders began charging interest on purchases immediately after they were made.

Even a consumer who paid off a new purchase in full by the next payment date would be charged interest before the bill was even received. The act requires issuers to give at least a 21-day grace period to repay purchases without interest.

Notably, this grace period does not necessarily apply to cash advances or balance transfers. The terms of these are detailed in the credit card agreement.

## Grace Periods vs. Deferments: Key Differences Explained

Similar to grace periods, a [deferment](https://www.investopedia.com/ask/answers/111314/whats-difference-between-grace-period-and-deferment.asp) is a period of time in which a borrower is not required to make payments on a loan, usually in cases of financial hardship. Unlike grace periods, deferments aren't automatic. Borrowers must apply and provide proof of hardship. In most cases, loans continue to accrue interest during a deferment, so it is wise to make any payments that you can during these periods.

> **Warning**
>
> Depending on the contract, loans may accrue interest during a deferment or grace period.

## Important Considerations for Grace Periods in Contracts

Any contract that has a grace period will also include language that explains what will happen if the payment is not made by the end of that period. Penalties can include a late payment fee, a penalty interest rate hike, or the cancellation of a line of credit. In cases where an [asset](https://www.investopedia.com/ask/answers/12/what-is-an-asset.asp) is pledged as [collateral](https://www.investopedia.com/terms/c/collateral.asp), multiple missed payments can result in the seizure of the asset by the lending institution.

## What Does Grace Period Mean?

A grace period is the period of time after payment is due but before late fees, interest, or other penalties start to accrue. Different contracts will have different grace periods; a monthly rental contract might have a grace period of five days, while student loan contracts have a grace period of six months after graduation.

## What Are Some Things You Can Do During the Grace Period?

For student borrowers, the six-month grace period is often used to find a job, choose a repayment plan that fits their budget, or enroll in another higher education program. This allows borrowers to establish a career before loan payments begin.

## What Is Another Word for Grace Period?

Grace periods are sometimes referred to as "forgiveness periods," although this is a misnomer. Debt obligations are not forgiven during grace periods, they are simply postponed for a short period of time.

Grace periods should not be confused for [deferments](https://www.investopedia.com/ask/answers/111314/whats-difference-between-grace-period-and-deferment.asp) or [moratoriums](https://www.investopedia.com/ask/answers/111314/whats-difference-between-grace-period-and-moratorium-period.asp), which are time periods in which a lender allows the borrower to miss payments due to hardships or other reasons.

## What Is the Grace Period of an Insurance Policy?

In insurance, the [grace period](https://www.investopedia.com/terms/i/insurance-grace-period.asp) is the time between the payment due date and the time when insurance coverage will be revoked due to nonpayment. This may be anywhere between 24 hours and a full month after payment.

If you miss a payment and later choose to reinstate coverage, your insurer may choose to inspect the property to make sure that there has been no new damage during the grace period. There may be additional penalties for late payment.

## What Is a Grace Period for Work?

In employment, the grace period refers to the time after a new shift begins, in which a late employee will not face any penalty. A typical grace period is seven minutes, since most time clocks round to the nearest quarter-hour.

There is also a grace period for foreign specialists on work visas. If an employee is terminated from their sponsoring employer, they may remain in the United States for up to two months to find a new job.

## The Bottom Line

Grace periods provide borrowers with a buffer to make payments after the due date without incurring penalties. They are particularly helpful for borrowers facing short-term financial challenges, allowing them to avoid immediate negative impacts on their credit reports. However, it's crucial to remember that grace periods do not mean payments are forgiven—they are merely delayed. Carefully review your contract to understand the specifics of the grace period and any potential consequences if you fail to pay by the period's end.

> **Article Sources**
>
> 1.  Federal Trade Commission. "[The Credit Card Accountability, Responsibility, and Disclosure Act of 2009](https://www.ftc.gov/sites/default/files/documents/statutes/credit-card-accountability-responsibility-and-disclosure-act-2009-credit-card-act/credit-card-pub-l-111-24_0.pdf)," Page 10.
>     
> 2.  Consumer Financial Protection Bureau. "[What Is a Grace Period for a Credit Card?](https://www.consumerfinance.gov/ask-cfpb/what-is-a-grace-period-for-a-credit-card-en-47/)"
>     
> 3.  Federal Student Aid. "[Student Aid Replacement](https://studentaid.gov/manage-loans/repayment#grace)."
>     
> 4.  U.S. Citizenship and Immigration Services. "[USCIS Publishes Final Rule For Certain Employment-Based Immigrant and Nonimmigrant Visa Programs](https://www.uscis.gov/archive/uscis-publishes-final-rule-for-certain-employment-based-immigrant-and-nonimmigrant-visa-programs)."