Acceleration Covenant

What Is an Acceleration Covenant?

An acceleration covenant is a contract provision that permits a lender to demand a borrower to immediately repay a loan in the event that specific requirements are not met. Likewise alluded to as an acceleration clause, the acceleration covenant specifies under what conditions the lender can demand immediate loan repayment.

How an Acceleration Covenant Works

Some debt securities and swap agreements incorporate an acceleration covenant. On the off chance that the borrower disregards quite a few terms — like missing payments or getting a downgrade of its debt — the assortment of payment and termination of the contract will occur immediately.

An acceleration covenant assists with protecting lenders who stretch out financing to businesses. Under an acceleration covenant, the borrowing party might be required to keep a predefined credit rating. This requirement safeguards the lender, who can demand immediate repayment assuming that the borrower's finances disintegrate.

Acceleration covenants are likewise found in commercial real estate loans. The acceleration covenant is important to lenders since it brings down the risk of the borrower defaulting. The agreements as a rule become possibly the most important factor when the borrower neglects to make payments, however organizing them in alternate ways is conceivable. An acceleration covenant could enable a lender to dispossess and claim a property. This clause might be helpful on the off chance that the lender accepts it can recuperate the loan's value through a resale.

Special Considerations

Not all acceleration covenants are something very similar. Some acceleration covenants might demand immediate payoff after the borrower misses a single payment. Different contracts will give more mercy on delinquent payments. An acceleration covenant may likewise incorporate boundaries for selling or transferring the property to another party.

After a contract breach, when the acceleration covenant comes full circle, the clause frees the borrower from any further interest payments and requires the borrower to pay back the loan completely.

Features

• An acceleration covenant is a requirement in a contract that permits a lender to demand a lender repay a loan immediately.
• Such covenants are a protection to lenders who give financing to businesses, possibly protecting them from losses should the lender's financial situation decline.
• The lender is permitted to institute this covenant or clause in the event that a borrower neglects to meet certain contractual agreements, like missing a payment or getting a debt downgrade.
• These sorts of clauses are found in a few debt securities and swap agreements, and commercial real estate loans, among different areas of business.