What Is An Acceleration Clause?
An acceleration clause is a contract term that enables a financial creditor to accelerate a mortgage repayment if the lender fails to satisfy specific requirements as written from the onset of the contract’s agreement. It empowers the creditor to demand compensation immediately after the lender fails to meet the deal’s agreements.
Acceleration clauses are prevalent in mortgage loans, and they assist the lender in reducing the chance of default. They are often based on payment defaults, but they can also be set up for other events. In most circumstances, if terms are broken, an acceleration clause will oblige the borrower to pay the complete total owing on loan right away. The borrower is relieved of all additional interest payments when the loan is paid in full, thereby paying off the loan early when the acceleration provision is triggered.
Payment delay is generally the basis for an acceleration clause. However, the number of overdue payments might vary. After one missing payment, certain acceleration conditions may require immediate settlement, while others may wait for two or three unpaid bills before insisting that the debt be fully paid.
During agreements, the amount of missed payments or broken responsibilities that are acceptable is essentially specified in the loan agreement.
Factors in triggering an acceleration clause may include selling or transferring the asset to a third party, failure to meet interest payments, a breach in the agreement, and Due-on-sale clauses (i.e., the burrower selling off asset mortgaged for the loan).
Acceleration Clause Example
Consider the following scenario: A college signs a new contract with an automobile company to purchase a motor bus for $250,000. Over the following five years, the $250,000 will be paid in $50,000 yearly. Let’s say the college makes the first three repayments but misses the fourth and fifth installments.
With an acceleration clause in place, the automobile company may demand the entire $100,000 right away. If not paid within the deadline, the company can take total ownership of the bus without refunding the $150,000 it has already collected.« Back to Glossary Index