WHAT IS AN “ACCELERATION CLAUSE”?
27/11/19 WHAT IS AN “ACCELERATION CLAUSE”? Acceleration clauses are terms in loan agreements that require the borrower to pay off the loan immediately if certain conditions are met. For example, most home mortgages have an acceleration clause that is triggered if the borrower misses too many payments. Acceleration clauses most often appear in mortgages, both residential and commercial. They also appear in some leases. When a lender invokes an acceleration clause, the borrower must immediately pay the unpaid balance of the loan’s principal, as well as any interest that accumulated before the lender invoked the acceleration clause. The borrower does not, however, have to pay the full amount of interest that would have come due had the loan been paid off normally. For example, most loans allow the borrower to accelerate the loan and pay off the loan early in a single lump sum to avoid paying interest for the remainder of the loan’s term. Few acceleration clauses trigger automatically. Instead, after the conditions in the clause occur, the lender may choose whether or not to invoke the clause. Where a lender gains the right to invoke an acceleration clause due to a borrower’s default, the lender may lose that right if the borrower corrects his or her default before the lender actually invokes the clause. In cases involving defaults for failing to make timely payments, tender is usually just as effective as actual payment at preventing the lender from invoking an acceleration clause.