The grace period is a period of time in which we will be partially or totally free from fulfilling certain commitments we have made.
For the specific case of loans, the grace period is understood as a ‘grace period’, that is, a time interval in which we will be free of the obligations 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, it has both advantages and disadvantages.
How does the lack of a loan work?
When a grace period is applied to a loan, what is achieved is to reduce the monthly installment to be paid. During this period of time we will not pay any fee or pay a reduced fee (paying interest only instead of repaying the principal 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 fee to be paid on the loan, waiting for our economic complications to be resolved. However, that will have an extra cost overrun that we will have to face, since the amount of interest to be paid will be greater the more generous this period of lack is.
How is the fee for a loan in need calculated?
To see how the period of lack affects the final amount that we will have to return we will raise the same case in three cases:
1) Loan without grace period
2) Same loan but with a period of partial lack (only pays interest the first year)
3) Loan with total deficiency (pays nothing during the first year).
In the example that we are going to give, we have requested a loan of 20,000 dollars at an annual nominal interest rate of 6%, whose monthly payments we have to pay. The amortization system chosen to illustrate this method is the French or constant installment method, since it is the most common and the easiest to understand.
In the second example (total lack) during the first twelve months we would not pay anything, but, with that, we would gain our debt. That is, 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 lack exist?
In the previous examples we have looked for simpler loan assumptions to favor the understanding of the lack of this type of financial products. However, there are loans that involve greater complexity and, for those cases, the best way to calculate the monthly installment to pay is to go to the simulators of the official bodies.
Broadly speaking, as we have seen, there are two types of lack: the partial, in which we will only pay the interest, leaving the payment of capital (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.
As we have seen, asking for a period of lack can be positive, since it can give you more flexibility in a difficult time. Therefore, in Best Bank we bet on introducing a “month of respite” so that, in the event of any unforeseen event, you can solve it. However, before requesting this period of lack, we recommend that you analyze your situation well and if you really need it, since it can increase the final amount that you will have to pay to return the credit line.