Acceleration Clause
Definition of "Acceleration Clause"
Acceleration Clause is a contractual provision inserted in a mortgage, a bond, a deed of trust or other credit vehicles, that gives the lender the right to demand repayment of the entire loan balance. Usually, such a clause becomes operational when there has been a default in payments of interest or principal or both.
When the acceleration clause is activated, the entire principal sum is called in and becomes due and payable. This fact would precipitate a foreclosure in the case of real estate, or bankruptcy action if the monies were not paid at the time of the call.
Acceleration clauses are created to protect the lender from borrower default and other risks. It prevents/deals with payment delinquencies, but can, on rare occasions, be structured for other occurrences too.
Let's see an acceleration clause in effect scenario:
Home Seller Barbara makes a Land Contract with Home Buyer Paul. He started paying correctly and living in Barbara's former house. He has paid already $30,000 of its $100,000 contract. At the end of it, he'll be the owner of the house. BUT: he didn't pay for the last 3 months, so the acceleration clause kicked in, Barbara filed for a land contract forfeiture and now Paul has to pay the rest of the $70,000 with one swing if he wants to still be able to get the house. Or else, they're done.
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