What is the grace period of a loan?

The grace period is a period of time in which we will be partially or totally freed from fulfilling certain commitments that we have contracted.

In the specific case of loans, the grace period is understood as a ‘grace period’, that is, an interval of time in which we will be free of the obligations that we have contracted with a financial entity.

Specifically, this type of operation usually occurs in cases where we request a large amount of money, such as a mortgage. However, this “financial aid” has nuances and, as we will see below, has both advantages and disadvantages.


How does the lack of a loan work?

credit problem

When a grace period is applied to a loan, what is achieved is to reduce the monthly payment to be paid. During this period of time we will not pay any fee or we will pay a reduced fee (paying only the interest instead of amortizing the principal of the loan).

In this way, we will have more time to return the loan along with the interest to the corresponding entity. Based on this operation, the advantages and disadvantages of the lack of a loan can be glimpsed.

On the one hand, if at the beginning of a loan (or later) we face the situation of economic difficulties, we can temporarily suspend or, at least lighten, the installment of the loan, waiting for our economic complications to be solved. However, this will have an extra cost that we will have to face, since the amount of interest to be paid will be greater the more generous this grace period is.

Let’s see an example!


How is the installment of a graceful loan calculated?

How is the installment of a graceful loan calculated?

To see how the grace period affects the final amount that we will have to return, we are going to pose the same case in three cases:

1) Loan without grace period

2) Same loan but with a partial grace period (only pay the interest the first year)

3) Loan with total deficiency (you do not pay anything during the first year).

In the example that we are going to give, we have requested a loan of 20,000 dollars at an interest rate of 6% per annum, whose installments we have to pay monthly. The amortization system chosen to illustrate this method is the French or constant quotas method, since it is the most common and the easiest to understand.

In the first case (partial deficiency), we observe that, during the first 12 months, we would only have to pay 100 dollars as interest rates, while, in the remaining 48 months, the fee that we would have to pay would rise to 469.70 dollars. In the end, with this partial deficiency, we should return a total of 23,745.60 dollars ($ 100 x 12 + $ 469.70 x 48).

In the second example (total lack) during the first twelve months we would not pay anything, but, with this, it would fatten our debt. In other words, for the remaining 48 months, the monthly fee to be paid would be 498.67 dollars. Therefore, the amount of money that we should return would be 23,936.16 dollars ($ 498.67 x 48).


What kind of deficiency exists?

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In the previous examples, we have looked for simpler loan assumptions to help understand the shortfall in this type of financial product. However, there are loans that involve greater complexity and, in these cases, the best way to calculate the monthly installment to pay is to go to the simulators of the official agencies.

Broadly speaking, as we have seen, there are two types of deficiency: the partial one, in which we will only pay interest, leaving the payment of principal (amortization) for later, and the total, in which we will not pay anything. Both can be requested at any time, although the most common is to do it at the beginning, since, in this way, the initial monthly fee will be lower and, therefore, more accessible.


Requesting a grace period can be positive

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Since it can give you greater flexibility in a difficult time. For this reason, at Cream Credit we are committed to introducing a “respite month” so that, in the event of any unforeseen event, you can solve it. However, before requesting that grace period, we recommend that you analyze your situation well and if you really need it, since it may increase a little the final amount that you will have to pay to return the line of credit.

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  1. Hallo, always great to see other people through the hole world in my searching, I really appreciate the time it should have taken to put together this awesome article. Cheers Leonelle Padraig Bluefield

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