What is acceleration clause in a car loan?

By | December 20, 2012

Also known as the “acceleration covenant” the Acceleration Clause in any car loan is a vital element that must be read and understood categorically by the borrower at the time of signing the loan agreement. Most of the car loan customers in the country are quite unaware of this clause and hence land up in undesired complications at a later stage when they are informed by the lender of the same after any default in the repayment schedule.

Understanding the acceleration clause in a car loan

 

Legally speaking the acceleration clause is a provision in a contract or a promissory note stipulating that if some specified event (like not making payments on time) occurs then the entire amount becomes due or other requirements become due at that point of time, pronto. This clause is most often found in promissory notes with installment payments for purchase of cars, real property. Some states prohibit “due on sale” and always allow the new property owner to assume the debt.

Simply speaking if the borrower for some reason makes any defaults in timely repayment or any other breach of contract/ covenant then the lender vide this clause has the right to demand for the repayment of the entire outstanding amount instantaneously. This clause is a protection for the lender against defaults in the repayment by the borrower.

When is the accelerated clause brought into effect?

The loan agreement document details all such conditions wherein the lender can bring the acceleration clause into effect legally and demand the repayment of the entire outstanding amount (principal as well as interest). Some the most commonly listed criteria are:

  • Default in making payment of stipulated installments as agreed upon in the loan contract. The number of defaults permitted before bringing in this clause varies per contract and is specified in the agreement for each car loan.
  • Default in making full payment of the amount that has been decided upon in the car loan agreement signed by both the parties.
  • Declaration of bankruptcy by the borrower while the car loan amount is still unpaid.
  • Any other intentional breaches of the covenant that can be legally bind the borrower to make complete repayment of the outstanding amount immediately.

Over the past few years there have been several cases of the lenders bringing the acceleration clause into effect citing various reasons. The clause also provides for repossession of the car which has been bought from the loan as a means of making good the outstanding amount. The borrower in such circumstances comes under tremendous financial pressure as the entire outstanding amount has to be paid back immediately or legal proceedings will be initiated against him by the lender. Thus one needs to carefully read the fine print of the promissory note while signing the agreement of the car loan in order to stay informed, aware and prepared for such an eventuality.

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