Too often, debtors see grace periods offered by lenders as free benefits. “Grace” makes it sound so innocent. However, debtors who routinely rely on grace periods when making payments will find themselves facing financial difficulties that might lead to bankruptcy. The reason is that although creditors offer grace periods to debtors, they also use them to their own advantage. Here’s why.
In short, loan payments are not due on the last day of the grace period; rather, they’re due when lenders say they’re due. If the check is delayed in the mail until after the grace period, or the Internet payment doesn’t clear in time, then it’s a very late payment. The creditor will assess all interest, penalties, and other fees that it would without the grace period.
Moreover, these extra costs are all free money to the lender. Debtors who refinance or renegotiate their loans to shave off a fraction of a percentage point end up losing everything if their payments arrive after the grace period. Thus, grace periods can lull debtors into paying higher effective interest rates than if they hadn’t refinanced at all and paid on time. Over time, debtors who fall behind on their debts despite using grace periods as a crutch might end up paying an effective financial surcharge each year that’s worth a few hundred dollars. It’s a bad habit.
Grace periods also hurt debtors because they can mislead them into believing that their last payments were due later than they were. As a result, homeowners who might be trying to cure missed mortgage payments might be surprised to find their homes in foreclosure sooner than they predicted, forcing them to scramble to stop it. The countdown to foreclosure is usually 90 days from the day the last payment was due, not the end of the grace period. Debtors filing bankruptcy might also be confused by how many payments they missed because they counted from the end of the grace period and not the payment deadline, adding more debt to the bankruptcy.
By contrast the advantages of paying down a debt before the deadline are quite clear: No penalties and somewhat less in interest. Even debtors who are heading toward bankruptcy nonetheless are better off than those who over-rely on grace periods. If your debts are becoming too hard for you to manage, then contact an experienced New York bankruptcy lawyer to discuss your options instead of turning to grace periods.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.