Accelerated Clause

What is Accelerated Clause?

An acceleration clause is a contract in a loan agreement that requires borrowers to repay the full principal amount if they Fail to meet certain requirements set by the lender. This clause is common in the Real Estate Industry.

So, if you miss payments, then your lender can initiate the acceleration clause. In this case, you need to pay the principal and interest owed on the loan immediately.

Circumstances for Acceleration Clause

Fail to meet interest payments

Interest payments are defined by the interest rates in which a lender charges a borrower. Interest are applied every month, and in case if the borrower fails to meet the requirements can be triggered.

Fail to meet mortgage payments

Not paying partial mortgage payments may result in the activation of an acceleration clause.

Due-on-sale clauses

A due-on-sale is a provision found in loan agreements which enables the lender to demand full repayment of the principal amount if the borrower sells the property which is mortgaged for the loan. In the same way, due-on-sale is very similar to acceleration clauses which can be used to trigger an accelerated loan repayment in case the property is sold.

Breach of debt contracts

Debt contracts are restrictions placed by lenders on loan agreements in order to adjust the interest of the lender and the borrower. The contracts usually limit the actions of the borrower and reduce the risk of the lender by setting certain rules.

In case the borrower breaches the restrictions, then the lender can trigger an accelerated clause and may demand full repayment.

Accelerated Clause Example

Let's suppose that ABC Ltd entered into a contract to buy five acres of Land from XYZ Ltd for Rs. 1 lakh. Now, the 1 lakh is to be paid in annual instalments of Rs. 20,000 for 5 years. ABC Ltd completes the first three payments. but fails to pay the fourth instalment on time.

With an acceleration clause, XYZ Ltd now demands Rs. 40,000 instantly. If the Rs. 40,000 is not paid in the given time frame XYZ Ltd can take ownership of the land without returning the Rs. 60,000 that is already received.