Definition
An acceleration clause is a term in a loan contract that lets the lender demand immediate repayment of the entire outstanding principal (the remaining balance) if the borrower breaks specified conditions of the loan. It is sometimes called an acceleration covenant.
How it works — plain language
– Under normal terms, a loan is repaid over an agreed schedule (monthly, annually, etc.). An acceleration clause moves repayment from that schedule to a single, immediate payoff when a triggering event occurs.
– The most common trigger is missed or late payments (delinquency). Other triggers can be transfer or sale of the collateral (for example, transferring title to a property) or other contract breaches identified in the loan documents.
– The clause does not cancel the loan automatically; it gives the lender the contractual right to demand full repayment. If the borrower cannot pay, the lender usually has the right to pursue remedies such as foreclosure on the secured property.
Key terms (short)
– Default: failure to meet a contract obligation (e.g., missed loan payments).
– Foreclosure: legal process by which a lender seeks to take and sell collateral (usually a home) to recover an unpaid debt.
– Cure period: any time allowed by the loan or law for the borrower to fix (cure) the breach before acceleration or other remedies proceed.
– Promissory note: the written promise to repay a loan (often contains the acceleration clause).
Typical features and variation
– Number of missed payments required before acceleration varies. Some loans accelerate after one missed payment; others require two or three or allow a cure period.
– Acceleration clauses are most frequently found in mortgage and real estate loans because those loans are large and secured by property.
– If a borrower pays the entire accelerated balance, they satisfy the loan early and stop further interest accrual. If they cannot, the lender may initiate foreclosure or other collection actions.
Checklist: what borrowers should do if acceleration might apply
1. Locate the loan documents (note and mortgage/deed of trust) and identify the acceleration clause and any stated cure periods.
2. Count missed payments and verify dates and amounts.
3. Read notice requirements: check whether the lender must give formal written notice before accelerating.
4. Contact the lender immediately to confirm whether they intend to accelerate and to ask about options (repayment plan, forbearance, loan modification).
5. Document all communications in writing and keep copies of payment records.
6. If unable to resolve, consider consulting a housing counselor or an attorney familiar with mortgage law in your state.
Checklist: what lenders typically must consider before invoking acceleration
1. Confirm a contractual trigger has occurred and that the lender followed notice and procedural requirements in the loan documents and applicable law.
2. Determine whether the borrower has any cure rights or pending loss-mitigation requests.
3. Evaluate alternatives (repayment plan, modification) if the goal is to maximize recovery and minimize legal costs.
4. If accelerating, follow statutory and contractual notice procedures prior to foreclosure or other remedies.
Worked numeric example
Situation: A borrower has a 30‑year fixed mortgage for $200,000 at 4.0% annual interest. Monthly payment is about $954. After 5 years (60 payments), the remaining principal is roughly $180,600.
– Normal path: the borrower continues making monthly payments of about $954.
– If the loan’s acceleration clause requires immediate payoff after a missed payment and the borrower misses a payment in year 6, the lender may demand the remaining balance—about $180,600—immediately.
– If the borrower pays $180,600 in full, the loan is paid off and no further interest accrues. If the borrower cannot pay, the lender can treat the borrower as in breach and proceed with remedies such as foreclosure.
(Values above are illustrative; exact payments and remaining balances depend on the precise loan terms and amortization.)
Practical points and cautions
– Many jurisdictions and loan documents require specific notice or a right-to-cure before acceleration or foreclosure. Always review the written loan agreement and local law.
– Acceleration is a contractual enforcement tool; lenders may choose to negotiate or offer alternatives rather than accelerate in every case.
– Transferring property (selling or gifting) can itself violate some mortgage terms, which can trigger acceleration in some contracts.
Further reading (reputable sources)
– Investopedia — Acceleration Clause: https://www.investopedia.com/terms/a/acceleration-clause.asp
– Consumer Financial Protection Bureau (CFPB): https://www.consumerfinance.gov/
– Cornell Law School Legal Information Institute (LII): https://www.law.cornell.edu/
– Board of Governors of the Federal Reserve System: https://www.federalreserve.gov/
Educational disclaimer
This explainer is for general education only and is not individualized legal or financial advice. If you face possible acceleration, foreclosure, or other contract enforcement, consult the loan documents and consider seeking professional legal or housing counseling for your jurisdiction.