What Is a Grace Period on a Car Loan?

A car loan grace period saves you from late payment fees, and it saves your lender from being pestered by requests for permission to pay a couple days late. In theory, repaying a car loan is straightforward--you make regular, set amount payments by a certain day each month. But when life occasionally prevents you from getting your payment to the bank on time, a grace period automatically allows you a few extra days beyond the due date before late fees are charged.

Identification

Car lenders often allow a grace period of 10 to 15 days before applying late fees. But don't assume your car loan has a grace period. Instead, learn about your particular loan by studying your loan documents before you sign them. The Truth in Lending Act requires that all terms of your auto loan must be disclosed to you before signing, in a "Disclosure Statement." Details that must be included are the loan interest rate and calculation method, loan processing charges, late payment penalties, applicable grace period and the lender's repossession policy.

Misconceptions

Late mail delivery of your monthly car loan statement does not extend your grace period. Since your loan documents specify your monthly payment due date and grace period if applicable, you are always responsible for remitting your payment on time. Proving late delivery of your statement will not earn you a reprieve from the payment penalty and possible extra interest.

Considerations

A grace period does not stop the accumulation of interest on your loan. In fact, depending on your loan contract, paying late may bump your loan to a higher interest rate. Also, if late fees are calculated as a percentage of your loan balance, usually you'll be charged the highest interest rate allowed by law.

Warning

Be aware that if your car loan does not specify a grace period, there is none. You are technically in default of your loan when your payment is one day late. In practice though, lenders who don't offer a true grace period, often extend an unofficial grace period by not charging fees for an occasional slightly late payment. However, you should not rely on this arbitrary courtesy as protection against late fees or repossession of your vehicle.

Prevention/Solution

If you anticipate needing to pay after the defined grace period for you auto loan, or paying even one day late when you have no grace period, communicate your financial situation to your lender as soon as possible. As long as the lender can be assured of payment, a lender would rather accept one or two late payments than pursue a costly repossession. Be sure to get your lender's agreement to accept your late payment in writing, since a verbal agreement will usually not be recognized in a court of law.

Resources

• More about consumer loans