A grace period is the time period during which the late penalty on the obligation due is not charged. In this period of time, the late payments regarding your due obligations are not charged with the default surcharges. In other words, Grace period is an extension period that is provided to you from your borrower out of good will.
Reasons for giving the grace period:
The grace period is a formality, and the borrower or creditor is not legally bound to provide the companies with the grace period. The reasons as to why the grace period is provided are as below:
- Warning: the grace period serves as a warning to the debtor that his or her credit limit is expiring, and it would be better if he or she pays up the money they owe soon enough
- Goodwill: as it is not a legal necessity to provide the debtor with the grace period, some companies do this out of good will and to attract costumers their way
- Legal action: by giving an extending time period to pay the debt, the company can save the costs of taking potential legal action against the debtor. Once the debtor is warned that their debt is overdue, they will arrange the finances to pay the debt, and this will save the hassle of legal actions the company otherwise will have to take.
Types of the grace period:
Depending on the types, the grace period is divided into many different forms:
In this type of grace period, the debtor is not charged with any penalty of any sort. If the debtors clear his or her debt within the grace period, then he or she is not charged with any penalty.
In this type of grace period, the debtor is charged a small amount of the penalty, which serves as a warning to the higher penalty that is to come if he or she fails to clear the debt in the grace period.
Suspension of certain privileges:
In this type of grace period, the debtor is denied access to the certain privileges, unless he or she clears his or her debt in the grace period.