George Simons | August 16, 2022
Summary: If a lender is using an acceleration clause to get you to pay off your loan now, you have options. Here's SoloSuit guide on the acceleration clause and how you can respond.
When you qualify for a loan you've applied for, you'll be required to sign some paperwork to close the deal. The paperwork will cover various agreements between you and the lender. Although it's always advisable to read and understand these agreements before signing anything, most people don't.
An acceleration clause is one of the most common and important elements of the contract between the borrower and the lender. Here's everything you need to know.
An acceleration clause is a condition in a contract that gives the lender legal permission to 'accelerate' the repayment of a loan if the borrower fails to meet certain requirements. These conditions are usually outlined in the contract between the borrower and the lender.
For example, one common condition is if the borrower skips a payment for the loan. In that case, the lender reserves the right to accelerate the loan repayment.
When lenders trust you with their money, they're taking a risk even though you may have a good credit score and a stable source of income. An acceleration clause allows lenders to recover the loan amount and partial interest if you fail to honor the terms of your contract.
For instance, if you lose your job unexpectedly and skip a mortgage payment, the lender might activate the acceleration clause, requiring you to repay the remainder of the loan faster than earlier agreed. So why would they want you to repay the loan in full if you're unable to make a partial payment in the first place?
Given that lenders take risks when they approve loans, they must have an 'exit strategy.' The acceleration clause works more like an exit strategy for such lenders. They want to minimize the chances of losing their money. So when you skip your monthly payments, it could signify that you're struggling financially.
However, it's also important to note that lenders can't activate the acceleration clause if you catch up with your missed payments before they enforce this clause. But they may be able to do so in the future if you skip payments again and fail to catch up with the missed payments on time.
The truth is, life happens. Some lenders might be able to work with you to help you regain financial stability. Others will be more interested in preventing more losses by accelerating this clause. This scenario works pretty much like a sinking ship. Some people may try to save the ship from sinking, while others might attempt to save themselves by jumping off the ship. In this case, the lender 'jumps off the sinking ship' by activating this clause.
When money is tight and you have several lenders trying to recover what you owe them, you'll feel overwhelmed. Your lenders know that you're probably not the only entity you owe money. They also understand that the first few days or weeks after a skipped payment are the most crucial. Chances are you'll still have some money to spare, and that's what they'll be targeting.
For example, they know you can use some of your business savings to settle the loan if you have a business. But when multiple lenders come to you simultaneously asking to recover what you owe them, there's always a possibility that you may not be able to pay off every debt account under your name.
You'll probably start thinking of other options to get yourself out of debt when that happens. Examples of such options include debt consolidation or filing for bankruptcy. Although filing for bankruptcy is usually the last option, it's also a lender's worst nightmare. They know that they can't recover anything from you when you file for bankruptcy. So rather than waiting for that moment to come, they'll activate the acceleration clause.
Some lenders will also activate the acceleration clause if you transfer the property to another party without their permission. Others will activate this clause if you cancel your insurance or fail to take care of the property (such as a house) as required by the contract.
The terms of agreement for a loan vary from one lender to another. It also depends on the type of loan being discussed. Typically, when a lender activates this clause, you'll only need to pay the entire loan amount plus any interests incurred when you violated the terms of the agreement.
Here's an example:
Example: If the contract requires that you pay $500 every month towards the loan and you fail to meet this requirement for a few months (the exact duration depends on the terms of the agreement), the lender has the right to activate the acceleration clause. In that case, you'll be required to pay any interest you should have paid during that period had you not skipped a payment. However, you'll not be required to pay the full initial interest you and the lender agreed on when processing the loan.
Most real estate contracts have an acceleration clause. For example, when you apply for a mortgage and get approved, you'll most likely sign a contract that contains this clause. When you fail to honor the terms of the agreement, the lender reserves the right to file a lawsuit for foreclosure on the property.
If you've been sued by a lender, it's crucial that you respond to the lawsuit on time. You have up to 35 days to respond to the lawsuit, depending on which state you live in. This might seem like enough time, but it's not. Responding to a debt lawsuit is one of the most complex things you can ever deal with.
Even worse, you may face severe consequences if you don't respond in time and correctly. For example, when you ignore a debt lawsuit, a default judgment will likely be entered into the case. This gives the lender the right to garnish your wages and seize your property. Responding will help you avoid that.
SoloSuit makes it easy to fight debt collectors.
You can use SoloSuit to respond to a debt lawsuit, to send letters to collectors, and even to settle a debt.
SoloSuit's Answer service is a step-by-step web-app that asks you all the necessary questions to complete your Answer. Upon completion, we'll have an attorney review your document and we'll file it for you.
"First time getting sued by a debt collector and I was searching all over YouTube and ran across SoloSuit, so I decided to buy their services with their attorney reviewed documentation which cost extra but it was well worth it! SoloSuit sent the documentation to the parties and to the court which saved me time from having to go to court and in a few weeks the case got dismissed!" – James
You can ask your questions on the SoloSuit forum and the community will help you out. Whether you need help now or are just looking for support, we're here for you.
Here's a list of guides for other states.
Being sued by a different debt collector? Were making guides on how to beat each one.
Is your credit card company suing you? Learn how you can beat each one.
Need more info on statutes of limitations? Read our 50-state guide.
Need help managing your finances? Check out these resources.