What does an acceleration clause allow a lender to do?

An acceleration clause is a provision within a loan agreement that allows a lender to demand full repayment of the outstanding loan balance if the borrower defaults on the loan. This means that if a borrower fails to make scheduled payments or violates any terms of the loan, the lender has the right to accelerate the loan, making all remaining principal and interest due immediately. This feature provides the lender with a means of protecting their investment by ensuring they can take prompt action to recoup the owed funds when the borrower is unable to meet their obligations.

The other options do not accurately reflect the function of an acceleration clause. Lowering the interest rate, modifying loan terms, or extending the repayment period are typically actions that would require negotiations and mutual consent between the lender and borrower, and do not pertain to the specific rights associated with an acceleration clause. In contrast, the ability to declare all outstanding payments due upon default is a critical aspect of loan security for lenders, reinforcing the significance of the acceleration clause in lending agreements.