What is a cure period in loan agreements and how does it affect default risk assessment?

• A. A cure period is the time after default where the loan can be accelerated.
• B. A cure period allows the borrower to rectify a covenant breach before default; length influences risk rating and remedies; longer cures can reduce immediate default risk but delay enforcement.
• C. The cure period is a fixed interest rate step-up period.
• D. The cure period begins after a covenant breach and cannot prevent default.

Answer: (D)

A cure period is a defined grace window after a covenant breach during which the borrower can fix the issue without default being declared. If the breach is cured within that window, no default occurs and the loan remains in good standing. The length of the cure period affects risk assessment because a longer window gives more time to bring the loan back into compliance, which can lower the immediate default probability and influence the choice of remedies in the lender’s risk modeling. However, longer cures also delay enforcement actions and potential losses. If the breach is not cured by the end of the window, default can be declared and remedies such as acceleration can begin. So curing a breach within the allotted time prevents default, whereas the option stating it begins after a breach and cannot prevent default is not accurate.