Grace period

economic-dictionary

The grace period is a delay, or deferral of payment included in many types of contractual relationship. It supposes a period of time of exemption from the fulfillment of a contract.

The establishment of a certain grace period translates into the non-obligation to comply with certain conditions in a temporary phase. Said breach can be both total and partial.

Usually, this type of temporary conditions are agreed in the different contracts between economic agents. In other words, whatever the nature of the contractual relationship, it is possible to establish previously agreed waiting periods.

Following the latter, the presence of these deficiencies is usually reflected by means of specific clauses that indicate the period of time agreed at the beginning.

Characteristics of a grace period

Generally, the existing grace periods share several features to take into account. Among these, the following should be highlighted:

  • Formalization: They are previously agreed and formalized by means of a contract or a policy.
  • Degree of deficiency: The conditions to be paused by means of a deficiency can be total or partial. In the case of installment payments, these can be temporarily canceled or reduced by a specific percentage. The method in which only the interest generated, and not part of the principal, on bank loans, is very common.
  • Start date of grace period: There are times when the grace period is applied at the beginning, as a way of offering and attracting new customers. On the other hand, in sectors such as insurance, it is common for minimum periods of time to be established for the application of the contract.
  • Advantageous or incentive sense: The possibility of establishing grace periods often works as an incentive to take out insurance, a mortgage loan or any other similar product that is subject to this characteristic.
  • Contingencies: The application of deficiencies can be at the request of the client, voluntarily or due to the appearance of other factors such as unemployment, illness ...
  • Change of expiration: The adoption of a period of this type supposes, simultaneously the delay of the date of completion of the contract in the same amount of time.
  • Modification of other conditions: Sometimes, when establishing a deficiency, the contract indicates the necessary modification of other conditions. An example of this may be an increase in the following installments or the impact of a higher interest rate.

Practical applications of a grace period

In the economic day-to-day, there are common examples of grace periods established in all types of contracts.

The most common application examples are in the following economic areas:

  • Loans and credits: Sectors such as banking establish contractual relationships between the entity and the client, through loans and credits of all kinds. It is usual that there are agreed conditions in which the client temporarily stops paying the return fees as an advantage.
  • Insurance policies: Insurance companies establish this type of conditions in almost all of their products. The policies work with deficiencies that prevent the contracting of insurance for nearby events and that have not generated enough fees. At that time, coverage is not fully applied.
  • Stock market: In terms of securities issues, it is usual to apply grace periods until the first payment for the acquisition of securities.
  • Legal areas: Apart from sectors such as insurance and finance, there are other applications of deficiencies in everyday life. Especially in labor and legal relations. A simple example would be a lack in the payment of allowances or maintenance due to a court ruling, as well as fines and penalties.

The concept of a grace period is often identified or confused with that of a moratorium period. However, in economic practice the differentiation between the two is that the deficiency usually establishes the maintenance of the interest payment and exemption of the principal.

However, this differentiation is usually less strict and conditional on the characteristics stipulated in each contract or policy.

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