Car Loan Acceleration Clause

The acceleration clause, also known as an 'acceleration covenant', is an important term in a car loan glossary. This car loan agreement term implies that the borrower needs to pay off the loan immediately in certain conditions. Failing to pay the car loan EMIs on time or selling the car are some of the conditions which will the acceleration clause present in the agreement. However, this clause doesn’t get activated automatically. It is completely up to the bank or the lender whether it wants to activate this clause or not. Most of the banks give repeated chances to the borrowers to fix the issues before triggering the clause.

In legal terms, this clause is a provision given in the car loan contract which specifically mentions that in case of any unpredicted circumstance the entire amount will become due and the borrower has to pay the amount to the lending authority at an immediate notice. To make it simpler, if you as a borrower default on paying the EMIs and other payments related to your loan on time, then the bank has the right to demand for the repayment of the entire amount within a specified time frame. This clause, in other words, is a protection cover for the lenders against the loan defaulters. It protects the financial interest of the lender in cases when the borrowers fail to repay the EMIs and breach the contract.

An acceleration clause, thus, is a vital element to be read and taken care off before signing the loan agreement. The fact is that most of the loan borrowers in the country are not well-aware of this vital clause and because of this lack of knowledge they often face issues due to defaulting on the loan. In order to avoid such undesired complications at the later stages of the loan tenure, here we have presented all the basic information related to car loan appreciation clause.

When can the Lender Activate the Acceleration Clause?

If there is an acceleration clause in your car loan agreement, the lender can activate the clause and send you an Acceleration notice if you miss to pay a monthly payment against your loan. Here is an example to help you understand better:

Example-

Let's pretend that you have an outstanding loan balance of Rs.5 lakh from your loan and you have failed to pay an EMI of Rs.30, 000 for one month. In such circumstance, if the lender wants, then utilising the mutually agreed upon provision the lender can ask you to pay Rs.5 lakh all at once within a particular period.

In case of failure, the lender will have the right to repossess your car and sell it to collect the remaining amount.

Which are the Grounds for Car Loan Acceleration?

In the agreement of car loan, all the conditions which can legally trigger the acceleration clause are detailed and based on that the lender can demand repayment of the entire remaining loan amount. The most common circumstances which are considered as defaults are enlisted here:

• If the borrower defaults on the monthly instalment payments which were agreed upon by both the parties while signing the loan document. Though a certain number of late EMI payments are permitted, it varies from lender to lender.
• In case the borrower fails to pay the entire amount on time as mutually decided by both the parties at the beginning of the contract.
• During situations when the borrower declares bankruptcy while he/she still has an unpaid car loan amount.
• As a result of failure to buy a car insurance, moving the car to some other place or selling it without permission, destroying or losing the car intentionally or unintentionally
• If the borrower commits any other intentional breaches, the lender can ask for a complete repayment of the remaining amount.

All the conditions that constitute a default are detailed in the car loan agreement, so in case you fail to understand how and why you defaulted and received the acceleration notice, look at your agreement to understand.

How Acceleration Clause is Used for Repossession?

The acceleration clause is considered as one type of repossession notice which the borrower may receive from the lender when his/her car loan is in default. This means, if you have an acceleration clause in your car loan agreement, your car is at the risk of repossession under circumstances such as late or missed payments, failure to keep your car insured or in case you have breached the loan agreement. Here are the steps how this clause is used to initiate the process of repossession:

• Acceleration Notice-An acceleration notice is the first intimation that you may receive from the borrower when you have defaulted on your car loan. It is sent by the lender to inform you that since you have fallen behind in payments, the full amount of the loan is due and you have to pay the entire amount to avoid repossession of your car.
• Notice and Opportunity to Cure- In the next step, the lender will send you a Notice and Opportunity to Cure notifying about the default and specifying a time-frame within which you have to pay all the dues to save your car from repossession. This notice is actually an opportunity for the borrower to repay the due amounts of past and get back the car.
• Post-Repossession Notice- In case you fail to pay the outstanding amount within the given time, the process will be escalated to the last stage by the lender where you will be sent a post-repossession notice mentioning the date and time of the sale. This notice confirms the repossession of your car and after that there is no way to get it back.

How to Avoid Acceleration of a Car Loan?

You should stay informed about the presence of acceleration clause in your loan agreement.

• In case you default on your car loan, the loan will only accelerate if there is an acceleration clause between you and the lender in your loan agreement. If there is no such clause, then the lender can only ask you to pay off the due amount of the past. But, he will not be able to demand for a full repayment or can't repossess your car. Hence, while signing the loan agreement make sure to go through all the clauses well and agree only if you are comfortable with all of them.
• If you due to certain reasons don't feel confident about your repayment ability and feel that you might miss to pay a few payments, don't enter into an agreement where there is the presence of an acceleration clause. If the lender with whom you are in talk is not ready to eliminate this clause from the agreement or not ready to include a Notice and Right to Cure clause, you can look for other lenders and opt for a loan on mutually agreeable terms.
• In situations, when both you and the lender agree to have an acceleration clause in the car loan contract, make sure that all the terms and conditions are mentioned clearly in the agreement. If the lender wants the provision of accelerating the loan in case the consumer fails to miss even one of the grounds for acceleration, then the lender has the right to accelerate the debt. Also, discuss with the lender and ask him how many chances he is willing to give before accelerating the loan. Whatever conditions you both agree upon, make sure is clearly mention in the agreement to avoid any kinds of confusions in future.
• Once the loan is accelerated by the lender, the entire amount will become due and there are very few instances where the borrower has been able to repay the loan amount and clear his/her debt. To avoid such a situation, if you in any month fail to pay the EMI, immediately talk to the lender and discuss the repayment options as well as for some extended time.
• In case, you already have received an acceleration notice from the lender, don't give up. Try to negotiate with him to avoid repossession. Remember, the intent of the lender behind sending the message is often to compel you pay the outstanding amount and not to repossess the car as due to the depreciation of the car value, this will not be a good deal for him. Hence, try to convince him and settle down on reasonable payment options to avoid losing your car forever.
• The repossession rules are not the same in every state. In some of the states, the lender is allowed to send an acceleration notice only once. Hence, if you have already a record of defaulting on a car loan and curing it in past, ensure not to default on the loan once again. If you default on the loan for a second time, it is less likely that the lender will give you a second chance of curing the default. Even if he wants in certain cases, he might not have the provision to do so.

In the recent years, it has been seen several times that the lenders brought the acceleration clause into effect for various reasons. The clause allows the lender to repossess the car which has been hypothecated by the lender to collect the loan amount in default cases. Naturally, in such circumstances, the borrower goes through huge financial stress as he/she needs to repay the entire amount immediately in order to avoid legal proceedings. This is why it is extremely important for you as a borrower to read through the promissory note minutely and go through each and every point mentioned in the contract in detail before signing the car loan agreement. It will help you to stay informed, wary and prepared to face any such situations in future.