What Does It Mean to Accelerate a Loan?

Close-up of man signing loan paperwork
Image Credit: Szepy/iStock/Getty Images

Loan acceleration clauses appear in residential mortgages, commercial property loans, student loans and other types of contracts. They protect the financial interest of lenders in the event that a borrower fails to make repayments and defaults on the loan contract. If a lender accelerates a loan, the borrower has to immediately pay the entire balance of the loan, not just the current due payment. To obtain this right, the lender must include a loan acceleration clause in the lending document.


Interest Payable

Using an acceleration clause costs the lender interest income. When the lender demands immediate payment, the lender has the right to collect any interest on the loan that the borrower currently owes, but the lender loses the right to receive future interest payments. The lender loses much more interest income on a new loan because earlier payments are mostly interest, and later payments are primarily principal.


Video of the Day


Using an acceleration clause is risky for the lender. The borrower usually doesn't have enough cash available to pay off the full loan balance immediately. If the loan is secured by a truck, for example, the bank can repossess the truck, although new vehicles depreciate rapidly so the bank may not be able to get its money back by selling the truck. One exception is an acceleration clause on a home mortgage that triggers if the homeowner sells the house.



The bank does not have to use the acceleration clause. In some cases, the threat of the process may be a way of opening negotiations with the borrower. A bank may be willing to negotiate if it believes it will lose money by attempting to collect immediately. The collection process involves additional costs, such as lawyer fees and collection agency fees. The bank considers the likelihood that the borrower will be able to make future interest payments, even if the borrower has missed payments and is technically in default.


Prepayment Penalty

With some types of loans, such as real estate loans, the loan includes a prepayment penalty. This ensures that the bank receives a profit if the home buyer decides to refinance immediately. According to the ABI Law Review, accelerating a loan removes the prepayment penalty, because the bank decides to accelerate the loan, not the borrower.


Automatic Acceleration

If the borrower declares bankruptcy, any loan that the borrower has taken out is accelerated, even if it doesn't include an acceleration clause. The borrower usually does owe any prepayment fees if she declares bankruptcy, according to the ABI Law Review.



Report an Issue

screenshot of the current page

Screenshot loading...