Acceleration Clause (Loan Agreement) - Explained
What is an Acceleration Clause?
Written by J. Mance Gordon
Updated at April 18th, 2022
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Table of Contents
What is an Acceleration Clause?How Does an Acceleration Covenant Work?How an Acceleration Covenant WorksWhat is an Acceleration Clause?
An acceleration covenant or an acceleration clause refers to provision used by a lender to demand repayment of all outstanding loans if the borrower breaches the terms on the contract. This covenant is often used in debt contracts or loan arrangements between the two parties. A lender cannot just apply the acceleration covenant in any situation, there are certain criteria for accelerating repayment. A breach in the terms of a loan contract often triggers the use of an acceleration covenant, in this situation, the lender decides to accelerate the repayment of loan.
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How Does an Acceleration Covenant Work?
Certain debt instruments make use of the acceleration covenant or clause, an example is swap agreement. This clause provides a lender with an option to hasten the repayment of loans if a borrower defaults the terms of repayment outlined in the debt contract. A borrower that violates a term of the contract can be asked to repay all of an outstanding loan before the maturity date. An acceleration covenant protects lenders from breaches of term of covenant that they might suffer from borrowers. Usually, every loan arrangement has certain credit requirements that the borrower must agree to, if a borrower defaults, the lender can use the acceleration covenant requesting that the borrower repays the loan before the specified date.
How an Acceleration Covenant Works
An acceleration clause or covenant is majorly used in mortgage loan agreements, swap agreement and real estate loan contracts. However, there are slight differences in how acceleration clauses work in different contract settings. Since not all acceleration covenants are the same, how they work also differ. An overdue payment or lateness in payment is one of the factors that triggers the application of the acceleration clause. This lateness in payment is called payment delinquency. The terms of the contract determines when the acceleration clause will be applied. Some contracts might permit a borrower to be delinquent or miss some payments before the acceleration clause takes effect while some contracts do not permit this. A contract breach also cause an acceleration covenant to take effect.