Grace Periods in Loan and Credit Card Contracts

A grace or interest-free period is a timeframe during which no penalty interest or late payment fees are assessed. It varies from one lender to another and depends on the type of loan or credit card of choice. It is an interest-free period provided that the balance is paid by the due date.


The grace period varies between 16 and 25 days or longer. There are different methods of charging and calculating interest, including daily accrual, two-cycle average daily balance, and previous, adjusted, and average daily balance. The interest rate varies, depending on the type of product and so does the grace period and penalty interest. Interest charges add up if you carry a balance. They are in the form of residual interest. Your card issuer may raise the interest rate as well if you are late on your payments. Late and missed payments often result in card cancellation, damage to the borrower’s credit score, and penalties.

Monthly Statements and Finance Charges

Credit unions, banks, and other providers bill statements on a monthly basis. Bills should be delivered to cardholders before they are due. The monthly statement shows the annual percentage rate on cash-like transactions and purchases. The length of time and due date should be specified in the credit card agreement. Even if the issuer offers an interest-free period, finance and interest charges apply if you make the minimum payment only. Interest begins to accrue unless you pay the balance in full.

Cash-like Transactions and Cash Advances

In general, cardholders don’t pay finance charges within the interest-free period. It is important to avoid cash-like transactions and taking cash advances. Money orders and wire transfers are examples of cash-like transactions. Balance transfers and convenience checks are excluded from the interest-free period meaning that interest begins to accrue immediately. Lenders charge different rates on purchases, checks, cash advances, and balance transfers.

Financial institutions feature credit cards and installment loans with a grace period. Some landlords also offer a window period during which rent must be paid. For example, the payment will not be considered late if made between first and tenth of the month. Tenants who are late face charges.

Student Loans and Insurance Policies

Borrowers who make payments during a period of forbearance, deferment, or grace benefit from reduced interest charges over the term of the loan. The payments they make go toward the principal balance. The outstanding balance is reduced when interest charges begin to accrue. Government student loans are one example whereby borrowers start making interest payments once they graduate, leave college, withdraw from their program, or drop bellow half-time enrollment. The grace period on unsubsidized and subsidized student loans is usually 6 to 9 months. Borrowers are also allowed to choose a repayment plan that suits their requirements. Debt consolidation is one option for students with multiple or excessive debts. In addition, students apply for health profession, dental, primary care, and other loans. The terms and interest rates vary. It is best to contact your loan officer and ask whether there is a grace period. The details are usually listed in the promissory note. Also check whether the loan is on a quarterly or monthly billing cycle.

Insurance companies also offer policies with an extended period after which premiums are due. It can vary from 1 to 30 days, depending on the insurer and type of policy, i.e. car, term, or life insurance. Extra charges apply if you are late, e.g. if you fail to make payment by the due date. Utility companies also assess penalty charges on late payments. In some cases, government agencies also extend the deadline for certain activities and services like choosing a healthcare plan.


While paying the balance in full sounds easy, studies show that only 42 percent of cardholders pay the full balance. Some 18 percent of consumers only make the minimum payment. Thus 40 percent of holders pay less than the full balance and more than the minimum, and interest charges add up. The problem is that the charges increase the cost of borrowing. For example, if you make $2,500 in purchases at 15 percent, you will pay $31.25 a month in charges.

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