What is an Acceleration Clause?
An acceleration clause is a powerful contract provision enabling a lender to require complete loan repayment from a borrower if specific conditions are unmet. This clause safeguards lenders by defining the triggers for demanding full loan repayment and the subsequent steps required from the borrower. It is also known as an acceleration covenant.
Key Insights
- An acceleration clause empowers lenders to demand full repayment of an outstanding loan if particular conditions are violated.
- The clause proclaims explicit scenarios under which lenders can insist on full loan repayment, such as maintaining a specified credit rating.
- Acceleration clauses act as insurance for lenders extending credit to businesses in dire need of capital.
Understanding the Acceleration Clause in Depth
An acceleration clause permits the lender to demand the entire loan balance before the conventional end-term under specific circumstances - often hinging on punctuate timely payments. Predominantly found in mortgage agreements, these clauses help assuage the lender’s risk concerning default.
Typically implemented amid mortgage contracts, acceleration clauses are designed to lower the risk for lenders. They generally hinge on conditions like missed payments, but other factors can also trigger them. When activated, the borrower must immediately pay the full outstanding loan amount, annihilating further interest payments and effectively concluding the loan.
While missed payments usually trigger an acceleration clause, the number of allowed missed payments can vary. Some clauses invoke full repayment after a single missed payment, while others might permit two or three. Moreover, property sale or transfer might also lead to clause activation.
An Example
Imagine a borrower with a five-year mortgage failing to make a payment in the third year. According to their loan’s acceleration clause, a single missed payment entitles the lender to demand the loan’s remaining balance. The borrower must then repay the entire remaining balance immediately. If they manage, they obtain the home title and full ownership. Failing which, they’re considered in breach of contract, allowing the lender to foreclose and repossess the property for resale.
How Acceleration Clauses are Enforced
Predominantly residing in mortgage and real estate loan agreements, acceleration clauses are integral to safeguarding large loans. By incorporating these clauses, lenders can mitigate borrower default risks and gain strategic control over the associated real estate assets. In case a borrower defaults, the acceleration clause endows the lender with enhanced foreclosure capabilities and the potential for reclamation and profitable resale of the property.
Related Terms: Repayment, Acceleration Covenant, Loan, Interest, Delinquent, Real Estate.
