What is an acceleration clause?
An acceleration clause is a contractual provision that allows a lender to require a borrower to repay a loan in full if certain conditions are not met. An acceleration clause describes the reasons why the lender can request repayment of the loan and the required repayment.
It is also known as an “acceleration alliance”.
Explanation of the acceleration clause
An acceleration clause allows the lender to demand payment before the standard loan conditions expire. The acceleration clauses are generally subject to one-off payments.
Structuring of acceleration clauses
Accelerator clauses are the most common in mortgage loans and help to mitigate the risk of default by the lender. They are usually based on defaults, but they can also be structured for other events. In most cases, an acceleration clause will oblige the borrower to immediately pay the balance due on the loan in case of non-compliance with the conditions. With full payment of the loan, the borrower is released from all other interest payments and essentially repays the loan early when the acceleration clause is invoked.
An acceleration clause is generally based on default, but the number of overdue payments may vary. Some acceleration clauses may invoke an immediate payment after a payment is missed, while others may authorize two or three missed payments before demanding that the loan be repaid in full. The sale or transfer of the property to another party can also potentially be a factor associated with an acceleration clause.
For example, suppose a borrower with a five-year mortgage does not make a payment in the third year. The loan conditions include an acceleration clause which stipulates that the borrower must repay the remaining balance if a payment is missed. The borrower would be immediately contacted by the lender to pay the remaining balance. If the borrower pays, he receives title to the property and becomes the owner of the property. If the borrower cannot pay, they are considered to be in breach of contract and the lender can seize and seize the property to resell it.
Acceleration clause appeal
The acceleration clauses are most often found in mortgage and real estate loans. Since these loans tend to be so large, the clause helps to protect the lender from the risk of borrower default. A lender may choose to include an acceleration clause to mitigate potential losses and have greater control over the real estate associated with a mortgage. With an acceleration clause, a lender has a greater ability to foreclose on the property and take possession of the house. This can be beneficial to the lender if the borrower defaults and the lender believes that he can obtain value through resale.