Acceleration Clause

The Definition

The acceleration clause is a clause that allows lenders to demand the remainder of an outstanding payment balance, or to collect additional collateral in case payments have not been made. If a person has not paid the lender the amount of money they said they would pay, or if the person has gone bankrupt, fails to pay mortgage property taxes, or breaks a loan covenant, the acceleration clause can come in effect on behalf of the lender.

Protection for the Lender

This kind of clause is a sort of protection for lenders, and it stands up in a court of law. With this, lenders can demand payment, or collect the payment plus interest or other requirements. It is considered a "law of contracts," which basically means that when a person signs a contract with a lender but breaks the contract, the lender is allowed to implement the acceleration clause to ensure they do not lose out on a bad deal. Mainly, acceleration clauses are most popular in real estate deals or mortgage contracts with lenders.

Example of Acceleration Clause Implemented

Let's give you an example of how an acceleration clause can come into play.

John decided to purchase a property from Mary for $100,000. Mary gave John a contract to sign, with all the stipulations necessary to allow the deal to go through properly for both parties. In the contract, Mary stated that the property was to be paid in 5 installments of $20,000 each during a certain amount of time. John successfully paid the first two payments, however, he did not make the third payment of $20,000. 

In the contract, Mary wrote up an acceleration clause, stating that if payments are not made in the appropriate amount or on time, the individual could risk losing the property all together and losing any payments he has made on the property thus far.

Since John has not paid Mary the third payment, she exercises her acceleration clause rights by demanding the full payment immediately, plus interest, or he will lose the property plus the $40,000 he has already paid on it.