Acceleration Clause

What Is an Acceleration Clause?

An acceleration clause is a term written into a loan agreement, bond indenture, or mortgage that changes the normal repayment schedule when something goes wrong. Ordinarily, a borrower repays principal and interest in regular installments over time. If the borrower triggers a specified default condition, the clause lets the lender declare the entire remaining balance due at once.

How It Works

Most acceleration clauses list specific events of default. Common examples include missing a scheduled payment, failing to maintain required financial ratios, filing for bankruptcy, selling the property securing the loan without permission, or breaching a promise made in the contract, known as a covenant.

When a default occurs, the lender usually must give notice, and in some agreements the borrower has a short window to fix the problem, called a cure period. If the problem is not resolved, the lender can invoke the clause. The loan then becomes immediately payable, and the lender can pursue collection, foreclosure, or other remedies allowed by the contract and the law.

Some agreements use automatic acceleration, where the debt becomes due the moment the default happens without any action by the lender. Others use optional acceleration, where the lender must choose to enforce it.

Why It Matters to Investors

Acceleration clauses matter most to bondholders and shareholders of companies with significant debt. If a company breaches a covenant on its bonds, a bond trustee or a group of bondholders may be able to demand immediate repayment. This can force a company to raise cash quickly, sell assets, or restructure, and it can sharply affect the company's stock price and credit rating.

Cross-default and cross-acceleration clauses extend this risk. These provisions allow a default on one debt to trigger acceleration on other debts, which can spread financial stress across a company's obligations.

For individual borrowers, acceleration clauses are a key reason to read loan terms carefully. A single missed payment can, in some cases, make the full balance due, not just the overdue amount.