Acceleration Clause in Loan Agreements

Acceleration Clause in Loan Agreements

An acceleration clause is a provision in a loan agreement that allows the lender to require the borrower to repay the entire loan balance, along with any accrued interest and fees, upon the occurrence of certain predefined events. This clause is typically designed to protect the lender’s interests by allowing them to take swift action if the borrower defaults or breaches the terms of the loan.

When activated, the acceleration clause triggers the immediate payment of the remaining loan balance, rather than allowing the borrower to continue making regular payments. Common events that may activate an acceleration clause include:

1. Default on Payments: If the borrower fails to make scheduled payments on time, the lender can invoke the clause.
2. Bankruptcy: If the borrower files for bankruptcy, the lender may use the clause to recover the outstanding debt.
3. Violation of Loan Terms: Engaging in actions that violate specific terms of the loan agreement, such as using funds for unauthorized purposes, can also trigger the clause.

For example, if a borrower has a loan balance of $100,000 and an acceleration clause is invoked due to missed payments, the lender can demand the full $100,000 immediately, rather than waiting for the borrower to catch up on missed installments. This mechanism is crucial for lenders, as it provides a way to mitigate risk and ensure that they can recover their funds promptly in the event of borrower default.