In economics, the acceleration clause is specifically in the context of finance and contract law is a provision in a loan agreement that allows the lender to demand immediate repayment of the entire loan amount if certain conditions are violated or not met by the borrower. It is generally triggered by events such as default on payments, bankruptcy or breach of other loan terms and conditions.
The acceleration clause can be considered as a safety switch for lenders. For example, if someone takes a loan and agrees to pay it back in small parts over time. This clause says that if a certain rule is not followed, the lender can ask for the full payment right away instead of waiting for the whole germ of the loan.
Acceleration clause is commonly used in mortgage agreements, business loans and other types of long term lending agreements. They play an important role in risk management as they provide a mechanism for the lenders to protect themselves against the risk of default or other contract violations by the borrower.
Let’s see how it can be used by the lender
- A homeowner with a mortgage might have an acceleration clause in their loan agreement. In case if they fail to make payments for a certain number of months, the lender can invoke this clause which requires immediate repayment of the entire mortgage amount.
- In case of a business loan, if the borrowing company goes bankrupt or violates any specific terms and conditions of the loan agreement, the lender in this case can invoke the acceleration clause to demand full repayment immediately.
Source: A to Z of Economics by Dr. NC Raghavi Chakravarthy