Acceleration Clause
An acceleration clause is a contract provision that allows a lender to require a borrower to repay all of an outstanding loan if certain requirements are not met. An acceleration clause outlines the reasons that the lender can demand loan repayment and the repayment required.It is also known as an "acceleration covenant."
Definition: An acceleration clause is a provision in a contract that allows the lender to demand the borrower to repay all outstanding loan amounts immediately if certain conditions are not met or if the borrower defaults. The clause specifies the conditions that trigger the acceleration and the amount that needs to be repaid. It is also known as an 'acceleration covenant.'
Origin: The concept of acceleration clauses originated in financial contracts and loan agreements to protect the lender's interests. As financial markets evolved and loan products diversified, acceleration clauses became standard, especially in mortgage and commercial loans. Its history dates back to the early 20th century when financial institutions began systematically managing loan risks.
Categories and Characteristics: Acceleration clauses mainly fall into two categories: 1. Default Acceleration Clauses: Triggered when the borrower fails to make timely interest or principal payments or violates other contract terms. 2. Non-Default Acceleration Clauses: In some cases, even without default, the lender can demand early repayment based on specific contract terms, such as the borrower selling the collateral asset. Characteristics of acceleration clauses include protecting the lender's interests, increasing the cost of default for the borrower, and enhancing the seriousness of the loan contract.
Case Studies: Case 1: A company borrows from a bank to expand its business but fails to make timely interest payments due to poor management. The bank invokes the acceleration clause in the loan contract, demanding immediate repayment of all outstanding loan amounts. Case 2: A homeowner agrees in a mortgage contract that if they sell the property, they must repay all outstanding loan amounts immediately. The homeowner decides to sell the property, and the bank invokes the acceleration clause to demand early repayment.
Common Questions: 1. When is an acceleration clause triggered? Typically, it is triggered when the borrower defaults or violates contract terms. 2. What impact does an acceleration clause have on the borrower? The borrower must repay all outstanding loan amounts immediately, which may cause financial strain. 3. Do all loan contracts have acceleration clauses? Not all loan contracts have them, but they are common in mortgage and commercial loans.
