What Is an Acceleration Clause?
Let me explain to you what an acceleration clause is. It's a provision in a contract that gives the lender the right to demand that you, as the borrower, repay the entire outstanding loan if you don't meet certain requirements. This clause spells out the exact reasons why the lender can call for repayment and what that repayment entails.
You might also hear it called an 'acceleration covenant.'
Key Takeaways
Understand that an acceleration clause or covenant is simply a contract term allowing the lender to make you repay the full loan if you fail to meet specific conditions. It clearly defines the triggers for demanding repayment, like keeping up a certain credit rating, and the repayment details. Overall, this clause protects lenders who provide financing to businesses needing capital.
Acceleration Clause Explained
An acceleration clause lets the lender demand payment from you before the loan's standard terms end. These clauses usually depend on you making payments on time.
You'll find acceleration clauses most often in mortgage loans, where they help reduce the lender's risk of your default. They're typically triggered by missed payments, but they can also apply to other events. In most situations, if you breach the terms, the clause requires you to pay the full balance immediately. Once you do that, you're free from any more interest payments and effectively pay off the loan early when the clause is activated.
The clause is often tied to payment delinquency, but the number of missed payments can differ. Some clauses demand full payoff after just one missed payment, while others might allow two or three before requiring it. Also, selling or transferring the property to someone else could trigger the acceleration clause.
For instance, suppose you have a five-year mortgage and miss a payment in the third year. If the loan terms include an acceleration clause that requires full repayment after one missed payment, the lender will contact you right away to pay the remaining balance. If you pay it, you get the title to the home and full ownership. If you can't pay, you're in breach, and the lender can foreclose and take the property to resell.
Invoking the Acceleration Clause
You see acceleration clauses most in mortgage and real estate loans. These loans are large, so the clause protects the lender from the risk of your default. A lender might include it to limit potential losses and gain more control over the property linked to the mortgage. With this clause, the lender can more easily foreclose and take possession of the home. This can benefit the lender if you default and they think they can get value by reselling it.
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