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Simple English definitions for legal terms
acceleration clause
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A quick definition of acceleration clause:
An acceleration clause is a part of a loan agreement that says the borrower has to pay back the loan right away if they break the agreement in a big way. This usually happens if the borrower misses a lot of payments. The borrower has to pay back the amount they still owe, plus any interest that has built up. Sometimes, the borrower can choose to pay off the loan early to avoid paying more interest. The lender can decide whether or not to use the acceleration clause, and sometimes they can't use it if the borrower fixes the problem. Some loans also have a clause that says the borrower has to pay back the loan if they sell the property it's for. This is to make sure the lender gets their money back. Parties can sometimes agree not to use the acceleration clause, and in some cases, the borrower can fix the problem and avoid having to pay back the loan right away.
A more thorough explanation:
An acceleration clause is a term in a loan agreement that requires the borrower to pay off the loan immediately under certain conditions. This clause is typically invoked when the borrower materially breaches the loan agreement. For example, mortgages generally have an acceleration clause that is triggered if the borrower misses too many payments.
Acceleration clauses may also appear in some leases and commercial mortgages. They may also specify that the borrower may pay off the loan in full prior to the loan's maturity date.
When a lender invokes an acceleration clause, the borrower must immediately pay the unpaid balance of the loan’s principal, as well as any interest that accumulated before the lender invoked the acceleration clause. However, the borrower does not pay the full amount of interest that would have come due had the loan been paid off normally.
For example, if a borrower has a 5-year loan with an interest rate of 5%, and they pay off the loan in full after 3 years, they would only pay interest for the 3 years they had the loan, not the full 5 years.
Acceleration clauses do not always trigger automatically. Instead, after the conditions in the clause occur, the lender may choose whether to invoke the clause. If the borrower corrects their default before the lender invokes the clause, the lender may lose the right to invoke the acceleration clause.
Some mortgages have clauses called “due-on-sale” clauses that allow acceleration if the borrower sells or transfers the real property if the mortgage has not been paid in full. These clauses are intended to protect the lender’s security interest in the mortgage. Due-on-sale and due-on-transfer clauses are regulated by the federal Garn-St. Germain Depository Institutions Act of 1982.
Home mortgage acceleration clauses are designed to trigger in situations where the mortgagee might want to foreclose on the mortgage. This allows the mortgagee to attempt to recover the entire unpaid value of the mortgage, not just the value of a few missed payments. In some jurisdictions, borrowers in this situation may undo the mortgagees’ invocation of acceleration clauses and avoid foreclosure by making up past-due payments and compensating the mortgagee for some or all the costs associated with the borrower’s default.
For example, if a borrower misses several mortgage payments, the lender may invoke the acceleration clause and demand that the borrower pay off the entire mortgage immediately. If the borrower cannot pay off the mortgage, the lender may foreclose on the property. However, in some jurisdictions, the borrower may be able to avoid foreclosure by making up the missed payments and compensating the lender for any costs associated with the default.