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