What is the grace period on a loan?

Another term we need to be familiar with to take care of our personal finances is the loan grace period. It can be an important resource when your financial situation gets complicated. If you don't know exactly what it is, here we clarify it for you.

What is the grace period for a loan?

The figure of grace period for any financing refers to a determined time in which the conditions of a loan or credit can be adjusted. That is, when you are going through a time when it is difficult to pay, the contract allows you to choose between 2 alternatives: paying only interest or not paying at all.

You can look at it as a grace period granted by the bank or lender that allows you to regroup while you work out your difficulties.

Because everyone can have problems paying off debts, this clause is usually included in loans with large amounts, such as mortgages, car loans, personal loans and student loans, among others.

Details of a loan grace period

The purpose of requesting a grace period is to reduce as much as possible the monthly payment of the loan you are amortizing. You can choose between paying only the interest with no principal balance or paying nothing for a reasonable period of time.

It is not difficult to assume that both options include an additional cost when the allotted term is over.

This grace period, assigned within the clauses of the contract, is a prudential time for you to get out of financial difficulties and not fall into default, which affects your credit score.

For this reason, this resource is usually included in agreements with people who in the past have incurred in arrears and who have regular to good credit.

Advantages and disadvantages of the loan grace period

The grace period for a mortgage loan, an auto loan or others depends on the terms provided by the bank. It can often range from a few months to 5 years.

On the other hand, this period is usually granted at the beginning of the loan after a significant disbursement has been made, as in the case of a mortgage.

In view of what we have already explained, this figure presents 4 basic advantages:

• It helps you reduce your loan installments, which could cost you half or less during this grace period. You also have the option of eliminating the monthly payment altogether.
• It serves to give you some financial comfort when you are going through a difficult time and need to reduce debt-related expenses.
• The grace period on a loan can save you from a penalty or a negative report that can affect your credit score. If you are financially compromised, you have this resource to safeguard your reputation.
• In some instances, if the contract does not stipulate the grace period for the loan, it is possible to negotiate it with your lender or bank. The entity will have to analyze your particular situation to make a decision.

Along with the good, you also have to consider the bad:

• The final amount you will end up paying will be higher than you initially estimated. That is why it is important to calculate how this benefit could affect your personal finances in the future.
• In the event that this resource is not part of the terms and conditions, you will have to negotiate it. This process requires a change in the conditions, which can cost you 1% of the amount that remains to be paid.

Types of loan grace periods

The grace period is a tool that is not available for all loans, since it depends on the institution and the amount requested. Regarding its differentiation, there are 2 figures that you can take advantage of according to the provisions of the contract:

• Partial grace period. This is what is called an interest-only installment, since you will only pay the interest corresponding to the principal balance of the loan.
• Total grace period. Unlike the previous one, this alternative implies that you will not pay a single cent for the term established by the agreement or through negotiation with the bank or lender. It is not unusual for financing with this condition to last longer than usual.

The terms of a loan can be negotiated at any time, especially when a substantial amount is involved. In addition to the grace period, you can also use an extension of time to repay. These options may include certain additional costs that you may not want to assume.

We look favorably on the grace period of a loan because it gives you the opportunity to meet your commitments in the appropriate manner and without defaulting.

Our recommendation is that you use it in a planned manner and as an alternative plan if you have not taken care of your finances.

Español: Qué es la carencia en un préstamo