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When you need just a little more time to make a loan or credit card payment, a grace period or a deferment could provide the help you need. Both grace periods and deferments let you put a pause on your payments, but which is the right choice will depend on the situation.
Grace periods are built into your account agreements and can give you a little wiggle room when you need it. Deferments are additional arrangements you work out with a lender or card company to help you get through a rough financial patch without the risk of defaulting.
Here are the nuts and bolts of grace periods and deferments, and a little help spelling out their differences.
What Is a Grace Period?
A grace period is the time allotted to pay a loan or credit card bill without incurring a penalty or additional interest. Grace periods are different depending on the type of account you're dealing with. Here's what grace periods look like on common debt accounts:
A grace period on a credit card is the period of time between the end of the billing cycle and the date your payment is due. This is also the period of time you have to pay off a purchase before being charged interest on it, assuming you don't already have a balance on the card.
On a student loan, your grace period is the period of time between your graduation (or the date you leave school) and the date your first loan payment is due. Most student loans have grace periods, but they can vary from one loan to the next.
Mortgages or Car Loans
Your home loan or car loan has a grace period between the monthly due date and the date on which a late fee will apply if you don't send a payment. For example, your mortgage may be due on the first of the month, but you might not be charged a late fee until 15 days later, on the 16th of the month.
It's easy enough to check the grace period on your loans and credit cards: Your account agreement spells it out. You can also check your online account for details.
What Happens During a Grace Period?
During a grace period, you don't incur a penalty for waiting to pay your bill. However, you may incur interest, so it pays to know your account terms so you can play by the rules.
- Credit cards: Pay the full balance on your credit card during the grace period to avoid paying interest. While many credit card accounts give you a 21-day grace period to pay off a purchase interest-free, this often applies only if you do not carry a balance. If you do carry a balance, your purchase may begin accruing interest immediately.
- Student loans: Consider paying interest during a student loan grace period. On unsubsidized student loans, you may be charged interest during the grace period before your loan payments begin. If you don't pay this interest before your grace period ends, it will be added onto your loan balance. This could increase the amount of your loan as well as your monthly payments for the life of your loan.
- Mortgages and car loans: Pay without penalty during the grace period on a mortgage or car loan. While it's not ideal to pay your loan after the due date, you should not incur a late fee as long as you haven't exceeded the grace period. You won't see a negative mark on your credit report either: Lenders don't report late payments unless they're more than 30 days past due—a rule that applies to student loans and credit cards as well.
What Is Deferment?
Like a grace period, a deferment is also a period of time during which no payment is due. Unlike a grace period, a deferment typically requires making an additional agreement with your lender or credit card company. If you negotiate a deferment, you can skip your payments for a specified time without a late fee or negative consequences to your credit. However, you may accrue additional interest or alter the schedule of your remaining payments.
Although deferments can be automatic—as with student loans that automatically defer if you enroll at a college or university at least half time—most require a negotiation or application process. For example, during the COVID-19 pandemic, some lenders and credit card companies offered deferments to clients who were undergoing financial hardship. But clients typically had to reach out and provide proof of hardship to qualify.
What Happens During Deferment?
Deferment means putting off a payment or set of payments until a later time. How it works depends on your loan and lender—or card account and card issuer. If you want to defer payments on a credit card account or loan, contact your lender and ask whether they offer deferments and what you need to do to apply.
Before you agree to a deferment, ask these questions to avoid surprises later:
- How long can I defer payments? One to three months is a typical timeframe.
- Will interest continue to accrue? If deferment puts a pause on interest, when will interest resume?
- When will I pay the deferred payment amount? Some lenders will add skipped payments, plus interest, to the end of your loan term. Some may require a balloon payment or a recasting of your remaining debt.
- How much is my next payment and when is it due?
- Will I pay fees or penalties? Also, will your interest rate or loan terms change?
- Will this deferment affect my credit? Most people want to negotiate a deferment to preserve their good credit, so look for terms that help you avoid late payments on your credit report, which can adversely affect your credit score.
Which Is Better: Grace Period or Deferment?
Both a grace period and a deferment can help you maintain your good standing when you're having a tough time making a payment. Your circumstances will most likely dictate which option is best for you.
Grace periods are built into your credit card and loan agreements. They provide a little payment flexibility, to minimize the consequences when you're just a day late on your mortgage or haven't yet landed your first job out of college. A deferment is an additional agreement you make with your lender or card company to delay a payment or set of payments when you're going through a period of financial difficulty. A deferment may also change how much interest you'll pay or how long you'll need to pay off your loan.
Taking advantage of grace periods and deferments can help you avoid skipped payments or default, both of which can have serious negative effects on your credit score. To make the best use of these tools, make them part of a larger plan to resolve any financial issues you're having and get yourself back on track. This may also be an important time to monitor your credit, which you can do for free with Experian. You'll be able to spot problems quickly, or rest a little easier knowing your credit is doing fine.