Written byAn acceleration clause is a term in a loan contract that lets the lender demand the whole outstanding balance immediately if the borrower breaches the agreement.
Also known as: acceleration provision, accelerated payment clause
Key points
- The usual trigger is default: missed repayments, a breach of covenants, or selling the secured asset without consent.
- Once accelerated, the full principal plus interest and fees falls due, not just the payments you have missed.
- For regulated consumer credit the lender must give a default notice under the National Credit Code and let the remedy period run before enforcing.
- Acceleration normally comes before the lender enforces its security or starts repossession.
- Under the National Credit Code a hardship notice must be decided within the statutory period; business facilities follow lender policy or the Banking Code.
How an acceleration clause works
A loan is written on the assumption that you pay it back over an agreed term. The acceleration clause is the lender's exit from that assumption. If a listed event happens, the lender can declare the loan immediately due and payable, which converts a long term obligation into a single demand.
It is not automatic in most contracts. The lender has to elect to accelerate and, for regulated credit, has to give the required notice first and let the period run. Business and commercial facilities can move faster, because the consumer protections do not apply in the same way.
What triggers acceleration
Missed repayments are the common one, and arrears that are not cured after a default notice usually do it. Contracts list others: giving false information in the application, letting insurance lapse on the secured asset, disposing of that asset, or breaching a financial covenant on a commercial facility.
Insolvency events sit in the same list. Entering administration, receiving a statutory demand or a director going bankrupt will typically give the lender the right to accelerate across every facility that borrower holds, sometimes through cross default clauses in unrelated loans.
What happens next
After a demand, the balance is payable in full. If it is not paid, the lender moves to enforcement: taking possession of secured goods, appointing a receiver, or proceeding against a guarantor. Default interest and enforcement costs are usually added to the balance along the way.
There is normally room to negotiate before that point. Refinancing elsewhere, selling the asset yourself rather than having it sold at auction, or agreeing a repayment plan are all common outcomes. Free financial counselling is available through the National Debt Helpline, and consumer disputes can go to AFCA.
Example
A transport business finances a prime mover over five years. Eighteen months in, cashflow tightens and three repayments are missed. The lender issues a default notice giving time to bring the account up to date. Nothing is paid, so the lender relies on the acceleration clause and demands the full balance, not just the three payments. The operator now has to refinance the whole amount, sell the truck, or negotiate an arrangement before the lender moves to recover it.
Not to be confused with
- Default
- default is the breach itself, acceleration is what the lender is entitled to do about it
- Early settlement
- early settlement is the borrower choosing to pay out early, acceleration is the lender demanding it
Frequently asked questions
What triggers an acceleration clause?
Most often missed repayments that are not brought up to date after a default notice. Contracts also list breaches such as false information in the application, letting insurance lapse, selling the secured asset without consent, breaching a covenant, or an insolvency event.
Can a lender demand full repayment of a loan?
Yes, where the contract contains an acceleration clause and a triggering event has occurred. For regulated consumer credit the lender first has to give a default notice and allow the stated period to pass. Commercial facilities generally give the lender more freedom to act quickly.
What happens after a loan is accelerated?
The whole balance becomes payable immediately. If it is not paid, the lender can enforce its security, which may mean repossessing the asset, appointing a receiver, or pursuing a guarantor. Default interest and enforcement costs are usually added to what is owed.
Is an acceleration clause legal in Australia?
Yes, and it appears in most loan contracts. Regulated consumer credit contracts have to comply with the notice requirements in the national credit legislation, and terms in standard form consumer or small business contracts can be challenged if they are unfair.
How do you stop a loan being accelerated?
Acting during the default notice period matters most, and paying the arrears usually cures the default. A hardship notice asks the lender to vary the contract: under the National Credit Code it must be decided within the statutory period, while business facilities follow lender policy or the Banking Code. AFCA and free financial counselling are also available.
Related terms
Default
A default is a borrower's failure to meet the terms of a credit contract, usually by missing repayments, which lets the lender demand the balance and enforce its security.
Read definitionArrears
Arrears are overdue repayments on a loan or credit account: the borrower has missed instalments, which the lender tracks by days past due and which can lead to a default.
Read definitionHardship
Financial hardship is when a change in your circumstances, such as job loss or illness, means you cannot meet your loan, credit or bill repayments on time.
Read definitionRepossession
Repossession is the enforced recovery of goods that secure a loan, such as a car, ute or machinery, after the borrower has defaulted on the contract.
Read definitionCovenants
Covenants are promises, obligations or restrictions written into a contract or recorded on land title that bind the parties, such as a borrower's promise to maintain minimum interest cover.
Read definitionSecurity (collateral)
Security (collateral) is an asset or legal interest a borrower grants a lender, which the lender can take and sell to recover the debt if the borrower defaults.
Read definitionGo deeper
Sources
This article is general information only and is not financial advice.