Acceleration: Overview, definition, and example
What is acceleration?
In a legal context, acceleration refers to a provision in a contract that allows one party, typically the lender or creditor, to demand the full payment of a debt or obligation before the scheduled due date. This often occurs if certain conditions are met, such as a default by the borrower. When a loan or debt is accelerated, all remaining payments become due immediately, rather than being spread out over the original term.
Why is acceleration important?
Acceleration clauses are important because they provide protection for lenders or creditors. If a borrower defaults on their obligations, the lender can invoke the acceleration clause to demand full repayment, ensuring they do not have to wait for the remaining payments. This can help mitigate the risk of continued non-payment and provide a clear course of action if the borrower fails to meet their obligations. For borrowers, understanding the potential for acceleration can highlight the importance of meeting payment terms to avoid severe financial consequences.
Understanding acceleration through an example
For example, imagine a business takes out a loan with monthly repayments over five years. The loan agreement includes an acceleration clause. If the business misses several payments or violates other terms of the loan, the lender may invoke the acceleration clause, requiring the business to pay the entire remaining loan balance immediately, rather than over the next few years.
In another scenario, a homeowner has a mortgage with monthly payments. If the homeowner fails to make payments for a specified period, the lender may use the acceleration clause to demand the full amount of the mortgage loan, including interest and fees, immediately.
An example of an acceleration clause
Here’s how an acceleration clause might appear in a contract:
“In the event of a default by the Borrower, the Lender may, at its sole discretion, declare the entire outstanding balance of the loan immediately due and payable, including all accrued interest, penalties, and fees, and demand full repayment of the loan in its entirety.”
Conclusion
Acceleration is a critical concept in lending and finance, offering protection to creditors and giving them the ability to demand full repayment of a debt if the borrower defaults. It serves as a safeguard, ensuring that the creditor has a clear path to recovering the owed amount. For borrowers, it’s essential to understand acceleration clauses to avoid the serious financial consequences of missed payments or contract violations.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.