What is the grace period of a loan?

When hiring a financial solution, be it a personal loan, car, housing, credit card or even some type of insurance, it is common to hear about grace period, especially when reading the contract or the general terms and conditions. But what does this term mean for sure?


Grace period: what is it and why use it?

Grace period

The grace period of a loan is nothing less than the period between the start of a loan and the start of amortization of the loan during which the borrower does not repay the loan capital, paying only interest on the loan. amount owed, with the installment being paid within this period.

However, during this period, the borrower pays only interest on the borrowed amount, with principal remaining constant.

This type of loan repayment, in which the customer only pays interest, has been quite in demand as the consumer is paying lower installments. However, at the end of the grace period, the installment to be paid will be higher, as it will then include the amortization aspect and the borrower may not be prepared for such an increase.


The grace period on mortgage loans

mortgage loans

As mentioned above, through this feature of the financial product, you can temporarily minimize loan charges. In addition, the grace period may be useful in specific situations, such as when the borrower buys a new home and keeps the old one for sale.

In these cases, the grace period may be available as an alternative to early repayment on a home loan, allowing you to play with time and with the available amounts. Basically, a person can borrow another home loan to move home, apply for it with a grace period to sell the current home, and repay the old home loan.


Total and partial capital deficiency


Certain types of loans may also include a total grace period, in which, as the name implies, there is a capital and interest grace period. In these situations, there is no installment payment during the agreed time period, so neither interest is paid.

Thus, once the total grace period is over, interest not paid during that time is incorporated into the outstanding principal and, as a result, higher interest will be generated (since interest will be charged on the sum of the principal plus the principal). accrued interest).