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In a loan agreement, an acceleration clause gives the lender the right to request full repayment of the outstanding balance if the borrower doesn't fulfill specific duties or violates the terms of the agreement.
How does an acceleration clause work?
An acceleration clause is triggered by certain events or conditions that are specified in the loan agreement. These can include:- Having one or more payments missed
- Failing to pay insurance or property taxes
- Without the lender's permission, you may not sell or transfer the property.
- Violating any of the loan's other conditions or covenants
What are the benefits of an acceleration clause?
An acceleration clause can benefit both the lender and the borrower in different ways. For the lender, an acceleration clause can:- Protect them against the possibility of the borrower defaulting or failing to pay
- Ensure that they receive their money more quickly and prevent drawn-out court battles.
- Increase their authority over the asset used to secure the loan
- Encourage the borrower to refrain from defaulting on the loan or illegally selling the property.
For the borrower, an acceleration clause can:
- Encourage them to fulfill their financial and other commitments on time.
- Help them avoid additional interest and penalties if they can pay off the loan early
- Allow them to negotiate better terms or rates with the lender if they have a good payment history
What are the drawbacks of an acceleration clause?
An acceleration clause can also have some disadvantages for both parties. For the lender, an acceleration clause can:- Reduce their income from interest payments over time
- Increasing the costs and risks of them reclaiming the property through foreclosure
- Tarnish their reputation and their connection to the borrower
- Place them in a difficult financial situation if they are unable to pay back the loan in full at once.
- Compel them to forfeit their assets or property in the event that they fail to repay the debt
- Restrict their ability to sell the property or mortgage it
How to avoid triggering an acceleration clause?
The best way to avoid triggering an acceleration clause is to comply with all the terms and conditions of your loan agreement. This means:- Making timely and complete payments
- Maintaining your insurance and property taxes
- Letting your lender know of any alterations or problems that could impair your capacity to make loan repayments
- Prior to selling or transferring your property, obtain your lender's consent.
- Knowing your rights and obligations under your loan agreement and properly reading it
You should get in touch with your lender as soon as you can and try to come up with a solution if you are having financial problems or think you will be unable to make a payment. It's possible that your lender will agree to change the conditions of your loan, waive some costs, or give you a forbearance period. But, this will rely on your unique circumstances and the rules of your lender.
