What Is An Acceleration Clause?
Definition: An acceleration clause is defined as a provision of a loan agreement that enables a lender to ‘accelerate’ the repayment of the loan from the borrower if certain conditions are not fulfilled. Acceleration clauses are used for protecting lenders who extend financing support to businesses in need of capital.
The acceleration clause is a clause typically invoked in loan and purchase agreements that require the borrower or payer of the funds to return or pay the entire amount of money immediately under certain conditions.
It can also be understood as a contract provision that enables lenders to ask borrowers to repay all of an outstanding loan in case the specific requirements are not fulfilled by the borrower. A lender can invoke the acceleration clause when a borrower materially breaches the agreement of the loan.
For example, mortgages generally incorporate an acceleration clause that is involved if the borrower misses so many payments.
All in all, an acceleration clause is a clause or term used in loan or purchase agreements. In the case of loan agreements, this involves the repayment of the principal amount in addition to the accrued interest at once and within short notice. In purchase agreements, under some specific scenarios, the purchaser may be asked to pay the remaining installments immediately within a short period of notice or face the consequences.
In certain countries like the United States, the omission of an acceleration clause can cause issues. Without an acceleration clause, the landlord will have to wait for the lease to expire before filing a lawsuit for damages against the tenant.
In the case of mortgage contracts, triggering the acceleration clause may be the catalyst for the repossession of the property by the creditor that has been mortgaged. This means that the lender of the funds – generally a bank – may sell the property that the borrower of the funds acquired via means of the mortgage loan.
Common Reasons For Activation of Clause an Acceleration
Some of the common reasons that lead to the activation of an acceleration clause are given below. It is worth noting that the reasons for invoking the acceleration clause will vary for each contract and that these are simply the common reasons that can trigger an activation clause in a contract. These reasons are:
1. Failure to meet interest/mortgage payments
The most common and apparent reason for triggering an acceleration clause is when the borrower defaults the payment for an installment. Both interest and mortgage payments occur at fixed intervals, and failure to pay mortgage or loan interest can cause the lender to trigger the acceleration clause.
2. Breaching debt-related agreements or clauses
Lenders place certain restrictions and agreements in the contract to ensure that the borrowers and the lenders are on the same page. These clauses or covenants can restrict the individual borrowing the funds to reduce the risks faced by the lender. Breaching or failing to comply with these clauses can trigger the acceleration clause.
3. Other similar clauses or provisions
There may be other provisions or clauses in some contracts instead of an acceleration clause. An example of such a clause would be a “due-on-sale” clause, which is functionally identical to an acceleration clause. Such clauses can be used to speed up the process of loan repayment.
4. Cancellation of property insurance
In most cases, the lender will require the borrower to maintain some form of property insurance to repair and restore it in case of any damages. This is because the lender wants the highest possible value with minimal expenses on the mortgaged property should the borrower default on payment. The lender is more likely to force the borrower to buy insurance – in general – rather than simply triggering the acceleration clause.
5. Filing of insolvency
In some cases, the filing for bankruptcy by the borrower can trigger the acceleration clause. This is because insolvency affects the lender’s ability to exercise their rights in such a situation.
Can A Borrower Avoid An Acceleration Clause?
As may be gleaned from the above information, an acceleration clause has bad news written all over it. Thankfully, there is a way to avoid losing property after triggering such a clause. In most cases, the borrower can work out a loan modification plan, also referred to as a mortgage reinstatement.
This works because the lender or seller of property usually does not want to be stuck with real estate on their hands. Despite this, the borrower may have to sometimes deal with the costs incurred by the lender during acceleration.
It is also important to note that these regulations can vary based on jurisdiction. The jurisdictional laws and the type of loan can influence whether or not the borrower can escape this clause.
Your Options After A Loan Acceleration
In some of the critical situations when you missed your mortgage payments or dropped your home insurance, you could end up facing acceleration clauses. Let us have a look at different options that you may try after loan acceleration-
1. Setting Up A Repayment Plan
You may try to request a mortgage reinstatement that comes in the form of a quote and will go over exactly how much you would need for paying to catch up on your missed loan payments along with any other fees. After paying the requested amount, you will be out of the defaulter list. Then, you will be able to start making your regular payments. You may opt for this before or during the foreclosure process.
2. Accepting Foreclosure
In case you can not repay the loan then you will the part of a preforeclosure process. During this time period, you will have the chance of catching up on your payments or refinancing your loan, or completing a short sale for preventing the foreclosure from affecting your credit.
However, if you do not make the payments and also avoid the foreclosure process, you could end up surrendering your home to the lender.
On the concluding note, it is clear that acceleration clauses can be put into the place for different reasons like missing mortgage payments, filing bankruptcy, canceling homeowners insurance, not keeping in livable condition, unauthorized property transfer, etc.
These acceleration clauses are used for outlining different situations when lenders can demand loan repayment.
Now, after understanding the whole concept, what will your definition of acceleration clause?