Grace Period

A grace period is a period of time which a lender allows after the due date of a debt payment, where borrower still make payment without being recorded as a late payment.

This effectively means that a late payment made by a borrower would not be officially marked as a late payment if it was made during the grace period.

The grace period is not a feature or benefit that is expressly stated by lenders in loan contracts.

This is because if there is a 14 day grace period after the due date of a scheduled home loan payment from example, then the actual due date would technically be the date 14 days after the due date!

The implementation of grace periods onto their products is an unwritten rule of doing business with banks and lenders. And it is probably up there with the worst kept secrets of banking.

A big reason for this is that people sometimes forget about making payments when they are busy with work, or unable to do it as they are travelling on holidays.

So lenders acknowledge and allow these possibilities and give a little leeway way their customers in good faith.

Moreover, overdue balances are not marked as delinquencies until their are 30 days past due.

So no real damage is done to any party should a payment be just marginally late… with the exception of opportunity costs that lenders forgo by not enforcing late payment fees.

A home loan for example, might have a flat late payment fee of $150 for each occurrence. A homeowner who makes repayment by cheque deposits might have totally forgot about it as he had to make a sudden business trip overseas to attend to an important matter. Not showing a little empathy with the client (especially if it’s a loyal customer) can be seen in a bad light. By allowing grace periods, lenders can build good will, and more importantly avoid unhappy customers who can be destructive to the brand image when such stories are reported on social media.

The period of time between a credit card statement date and the payment due date can also be classified as a grace period offered by the card issuer.

This is one reason why, one is bound to be penalized as soon as credit card due dates are exceeded… because the grace period has already been exhausted.

Other than referring to the extra number of days a debtor has to make payment without being late, grace period can also be a term that describes the period of time that a creditor does not charge interest on an account.

As we all know, banks are not charity and would charge interest on any types of facilities on a daily basis if they are within the legal means to do so.

Choosing to waive interest on outstanding account balances for a period of time is also classified as a type of grace period offered by lenders to consumers.

It must be noted that grace periods are not requirements that are set out in law.

Lenders and financial institutions are under no legal obligation to provide them to their customers.

So grace periods should never be seen as an entitlement.

If anything, they are gestures of goodwill by lenders to not always go strictly by the book and penalize borrowers at every opportunity.

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