Acceleration clause 

Acceleration clause 

In loan agreements and other types of debt agreements, an acceleration clause is a crucial feature. This clause gives lenders the authority to demand prompt repayment of the entire outstanding balance of a loan if specific conditions aren’t met, which can substantially influence both lenders and borrowers. The acceleration clause is intended to safeguard lenders from the possibility of default and guarantee prompt loan repayment. 

What is an acceleration clause? 

The term “acceleration clause” refers to a clause in a loan or debt arrangement that permits the lender or creditor to demand prompt repayment of the entire outstanding balance of the debt if specific circumstances are met, such as default or non-payment by the borrower.  The clause gives the lender or creditor the right to accelerate the payment schedule rather than waiting for payments to be made over time. This can be a powerful tool for lenders, allowing them to protect their investments and limit their risk exposure. 

Understanding acceleration clause 

Suppose the borrower doesn’t adhere to the terms of the loan agreement. In that case, an acceleration clause in the loan agreement enables the lender or creditor to demand immediate payment of the loan’s outstanding balance.    

For lenders or creditors, the acceleration clause is a potent instrument since it enables them to safeguard their investments and reduce their risk exposure in the event of borrower default. However, if borrowers cannot meet the accelerated payment schedule, it could result in the loss of assets or property, which could cause concern. 

When a lender uses an acceleration clause, the borrower must pay any accrued interest and the remaining principal balance of the loan that has not yet been paid. The entire interest amount that might have been required had the loan been repaid according to regular terms needs to be paid in full by the borrower. To avoid paying interest for the remaining portion of the loan’s term, most loans, for instance, permit the borrower to accelerate the loan and pay it off early in one lump amount. 

Acceleration clause explained 

An acceleration clause is significant because it can shield creditors or lenders against the possibility of default or non-payment by the borrower. The lender or creditor can demand immediate repayment of the remaining balance of the loan or debt in the event of default by incorporating an acceleration provision in the loan or debt agreement. By doing this, they can reduce their losses and risk exposure.  

The acceleration clause can also ensure that the lender or creditor receives payment immediately rather than waiting for instalments to be made over a lengthy period. This can help to ensure the financial stability of the lender or creditor, as well as the borrower, by helping to prevent situations where the borrower cannot meet their payment obligations. 

Although the quantity of past-due payments might change, an acceleration clause is often based on them. One missed payment may trigger an instant payback under some acceleration conditions, while two or three failed payments under others may be permitted before the loan must be repaid in full. An acceleration clause may also be affected by the sale or transfer of the property to a third party. 

Purpose of acceleration clause 

An acceleration clause allows lenders or creditors to protect their investments in case of default or non-payment by the borrower. It allows the lender or creditor to demand immediate repayment of the outstanding balance of the debt, which can help to limit their risk exposure and minimise their losses.  

By accelerating the payment schedule, the lender or creditor can also ensure that they are repaid promptly rather than waiting for payments to be made over an extended period. The acceleration clause is often included in loan or debt agreements to protect lenders or creditors and help ensure they can recover their investments in default or non-payment. 

Example of acceleration clause 

The acceleration clause notion can be better understood by looking at the examples below. If the borrower doesn’t make payments for a predetermined period, the mortgage may contain an acceleration clause that enables the lender to demand full repayment of the debt. Similarly, if an issuer defaults on its obligations, a bond deal may contain an acceleration clause that enables the bondholder to request immediate repayment of the principal and interest. Due to the acceleration clause, the lender or bondholder can request immediate repayment of the loan rather than waiting for instalment payments to be completed. 

Frequently Asked Questions

The most common contracts that include acceleration clauses are loan agreements, bond agreements, and other debt agreements. These contracts are typically used in business and finance to protect lenders or creditors against borrower default. 

The specific triggers for an acceleration clause in a loan agreement can vary depending on the terms of the agreement. However, common triggers may include default on loan payments, breach of contract, bankruptcy, or a change in ownership or control of the borrower’s business. 

An acceleration clause allows the lender or creditor to demand immediate repayment of the entire outstanding balance of a loan if certain conditions are not met. A demand clause, on the other hand, allows the lender or creditor to demand repayment of the outstanding balance of a loan at any time without the need for specific triggers or conditions. 

An acceleration clause allows the lender or creditor to demand immediate repayment of the entire outstanding balance of a loan if certain conditions are not met. On the other hand, an alienation clause restricts the borrower’s ability to transfer ownership or sell the asset securing the loan without the lender’s permission. 

A due-on-sale clause requires the borrower to pay off the loan’s outstanding balance when the underlying property is sold or transferred to a new owner. An acceleration clause allows the lender to demand immediate repayment of the loan’s outstanding balance if certain conditions are not met, regardless of any sale or transfer of the underlying property. 

Related Terms

    Read the Latest Market Journal

    Unlocking Stock Market Potential with AI

    Published on May 24, 2024 48 

    Introduction of AI In the world we live in today, artificial intelligence (AI) is almost...

    Financial Sectors Thriving: Top Traded Counters in April 2024

    Published on May 21, 2024 80 

    At a glance: The Federal Reserve (Fed) held interest rates steady at 5.25% to 5.5%...

    One Dollar at a Time: The Potential of Fractional Shares

    Published on May 20, 2024 75 

    Table of contents 1. Introduction 2. Dollar-Cost Averaging 3. Popularity of Dollar-Cost Averaging 4. Small...

    Unit Trusts vs Exchange Traded Funds (ETFs) – Which is better for your portfolio?

    Published on May 20, 2024 78 

    Imagine you are dining at a nice restaurant, feeling overwhelmed by the variety of seemingly...

    Weekly Updates 20/5/24 – 24/5/24

    Published on May 20, 2024 21 

    This weekly update is designed to help you stay informed and relate economic and company...

    What is CFD? With 2 Practical Examples

    Published on May 15, 2024 105 

    In this article, you will learn what CFD (Contract for Difference) is, the costs and...

    What is ESG investing, and why is it important?

    Published on May 15, 2024 110 

    Over the last five years, Environmental, Social, and Governance (ESG) investing has evolved from being...

    What are fixed-income funds?

    Published on May 15, 2024 62 

    In the diverse world of unit trusts, various funds employ distinct investment strategies aligned with...

    Contact us to Open an Account

    Need Assistance? Share your Details and we’ll get back to you

    IMPORTANT INFORMATION

    This material is provided by Phillip Capital Management (S) Ltd (“PCM”) for general information only and does not constitute a recommendation, an offer to sell, or a solicitation of any offer to invest in any of the exchange-traded fund (“ETF”) or the unit trust (“Products”) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. You should read the Prospectus and the accompanying Product Highlights Sheet (“PHS”) for key features, key risks and other important information of the Products and obtain advice from a financial adviser (“FA“) pursuant to a separate engagement before making a commitment to invest in the Products. In the event that you choose not to obtain advice from a FA, you should assess whether the Products are suitable for you before proceeding to invest. A copy of the Prospectus and PHS are available from PCM, any of its Participating Dealers (“PDs“) for the ETF, or any of its authorised distributors for the unit trust managed by PCM.  

    An ETF is not like a typical unit trust as the units of the ETF (the “Units“) are to be listed and traded like any share on the Singapore Exchange Securities Trading Limited (“SGX-ST”). Listing on the SGX-ST does not guarantee a liquid market for the Units which may be traded at prices above or below its NAV or may be suspended or delisted. Investors may buy or sell the Units on SGX-ST when it is listed. Investors cannot create or redeem Units directly with PCM and have no rights to request PCM to redeem or purchase their Units. Creation and redemption of Units are through PDs if investors are clients of the PDs, who have no obligation to agree to create or redeem Units on behalf of any investor and may impose terms and conditions in connection with such creation or redemption orders. Please refer to the Prospectus of the ETF for more details.  

    Investments are subject to investment risks including the possible loss of the principal amount invested. The purchase of a unit in a fund is not the same as placing your money on deposit with a bank or deposit-taking company. There is no guarantee as to the amount of capital invested or return received. The value of the units and the income accruing to the units may fall or rise. Past performance is not necessarily indicative of the future or likely performance of the Products. There can be no assurance that investment objectives will be achieved.  

    Where applicable, fund(s) may invest in financial derivatives and/or participate in securities lending and repurchase transactions for the purpose of hedging and/or efficient portfolio management, subject to the relevant regulatory requirements. PCM reserves the discretion to determine if currency exposure should be hedged actively, passively or not at all, in the best interest of the Products.  

    The regular dividend distributions, out of either income and/or capital, are not guaranteed and subject to PCM’s discretion. Past payout yields and payments do not represent future payout yields and payments. Such dividend distributions will reduce the available capital for reinvestment and may result in an immediate decrease in the net asset value (“NAV”) of the Products. Please refer to <www.phillipfunds.com> for more information in relation to the dividend distributions.  

    The information provided herein may be obtained or compiled from public and/or third party sources that PCM has no reason to believe are unreliable. Any opinion or view herein is an expression of belief of the individual author or the indicated source (as applicable) only. PCM makes no representation or warranty that such information is accurate, complete, verified or should be relied upon as such. The information does not constitute, and should not be used as a substitute for tax, legal or investment advice.  

    The information herein are not for any person in any jurisdiction or country where such distribution or availability for use would contravene any applicable law or regulation or would subject PCM to any registration or licensing requirement in such jurisdiction or country. The Products is not offered to U.S. Persons. PhillipCapital Group of Companies, including PCM, their affiliates and/or their officers, directors and/or employees may own or have positions in the Products. Any member of the PhillipCapital Group of Companies may have acted upon or used the information, analyses and opinions herein before they have been published. 

    This advertisement has not been reviewed by the Monetary Authority of Singapore.  

     

    Phillip Capital Management (S) Ltd (Co. Reg. No. 199905233W)  
    250 North Bridge Road #06-00, Raffles City Tower ,Singapore 179101 
    Tel: (65) 6230 8133 Fax: (65) 65383066 www.phillipfunds.com