Rent, utilities, groceries, loan payments and other bills are all part of life. We all have the best intention of paying each monthly payment in full by the due date. But, sometimes, life gets in the way causing us to fall behind and have a late payments.
That's where Grace periods come into play. We'll teach you everything you need to know about them and how they work. Through a variety of definitions and examples, you'll get a little smarter when it comes to personal finance.
Everything you need to know about grace periods
All loans, cash advances or monthly payments have a specific amount owed and a set payment due date. If you miss the payment due date, lenders will likely charge interest or require you to pay a late fee or other penalties.
Sometimes, you just need a little more time to pay your bill balance at the end of a billing cycle. That's where a grace period comes into play.
What is a grace period and how does it work?
A grace period is a set amount of time after a payment is due when you will not get charged late fees or additional interest charges as long as you pay the unpaid portion in a specific period of time.
They give borrowers a little breathing room to pay the monthly payment amount and avoid paying interest if they pay by a certain date. Grace periods can apply to:
- Cash advances
- A mortgage payment
- Car loans
- Student loans
- Insurance and medical bills
- Credit cards
- Rent
Let's say your rent is due on the first of each month but your paycheck doesn't land in your bank account until the third. Grace periods vary, but a landlord may give renters until the fifth of each month to make the rental payment in full. In this example, renters have a five-day grace period to make the next payment before getting charged late payments.
Now, if you pay your rent after the grace period — on the sixth or seventh of the month — you've missed the due date and and you would likely get charged interest or late fees at that point.
A grace period works to give borrowers a set amount of time after the deadline to make a payment and avoid interest.
How long does a grace period last?
A typical grace period is anywhere from two to three days to a full week. Timing varies by different lenders, so it's important to know when the billing period begins and ends and the exact time period for the grace period.
A grace period is not the same as a repayment plan. A grace period gives the borrower a little extra time between when the payment is due and when they'll actually have interest charges.
A repayment plan is a way to manage bills and payments. You make specific payments over a set period of time until your debt is repaid. These types of plans may also have grace periods, but the grace period itself refers to the period of time when you can make payments before interest or late fees get implemented.
Examples
Now that we've defined a grace period, let's walk through some more examples so you can see how they work in real-life scenarios.
Student loans
When you take out a student loan to pay for higher education, you commit to paying back the debt by a certain date and during a certain period of time. The more payments you make the lower your balance will become.
With federal student loans, the grace period is usually six months after you graduate or become a part-time student. You have six months upon graduation to start paying back your loan.
Student loan grace periods vary, so make sure to read the terms of your loan carefully to avoid a late fee or interest charge.
Credit cards
A credit card grace period is shorter than one for a student loan. Typically, credit card grace periods are the length of time between the end of a billing cycle and the due date. Credit bureaus give consumers a few days or a week between billing cycles. This gives you time to make a payment on new purchases and avoid getting charged interest.
To avoid paying interest, it's smart to make sure you pay the credit bill in full and within the allotted time. Otherwise, you may get charged interest, which can hurt your credit report.
Mortgage payments or rent
Like student loan or credit card grace periods, most mortgage and rent periods will have one, too. Mortgage lenders and landlords will specify how long it is. And, they'll outline when you must pay the money to avoid interest or a late payment fee.
Typically, a rent grace period is about a week, but you can discuss this in the lease terms.
What happens if you miss the grace period deadline?
Missing a payment is harmful to your financial health. Here are some things that can happen when you don't reduce your balance owed during the grace period:
- Lower your credit score — When you don't reduce the balance on your credit card or other lines of credit, your credit report may take a hit and your credit score may lower. Credit bureaus want to see that borrowers are paying for their purchases.
- Accrue more debt — Debt is a slippery slope. If you miss making payments during the grace period, the amount of money you owe to rent or other purchases will continue to build and you'll have more overall debt.
- Hurt your financial reputation — As a renter, you want a solid financial reputation so you can rent new properties or apartments easily in the future. When a future landlord goes to retrieve information about you and your financial history, you want a strong and positive reputation so you can easily get a new apartment lease.
Things to do if you're behind on rent
If you've fallen behind on rent, don't panic. There are things you can do to get caught up and maintain a healthy financial record.
- Talk to your landlord — If you're behind on rent and have missed the rent grace period, the first thing you need to do is candidly talk to your landlord about the situation. Let him or her know you're behind and tell them when you can have the rent to them. Honesty is the best policy in this case.
- Make a payment plan — Once you've shared your situation with the landlord, you can work together to craft a plan to submit your rent. You can make weekly, bi-weekly or monthly payments.
- Avoid new purchases — This may seem like a small thing to do if you're behind on rent. But, when you're tight on money, avoid spending in other areas of your life. It's tempting to make a new purchase. But, the more you can save, the more you'll have for your other bills.
- Tighten your budget — In general, it's a best practice to follow a budget, live within your means, work to increase your credit score and make all your bill payments within the allotted grace period.
Key takeaways on grace periods
Grace periods give you a specific amount of time after the initial deadline to make your payments before you're charged a late fee. It's crucial to know how long your grace period is and when it's due. From there, you can plan your budget accordingly.
The information contained in this article is for educational purposes only and does not, and is not intended to, constitute legal or financial advice. Readers are encouraged to seek professional legal or financial advice as they may deem it necessary.
The post What is a Grace Period? Rental Definition and Examples appeared first on Apartment Living Tips - Apartment Tips from ApartmentGuide.com.
