When a borrower fails to make loan payments, which clause may be invoked by the lender?

When a borrower fails to make loan payments, which clause may be invoked by the lender?

• A. Acceleration Clause
• B. Default Clause
• C. Prepayment Clause
• D. Liability Clause

Answer: (A)

The acceleration clause is a provision in a mortgage or loan agreement that allows the lender to demand the full outstanding balance of the loan if the borrower defaults on the loan payments. When a borrower fails to make payments as specified in the loan agreement, this clause enables the lender to act quickly to protect their financial interest by accelerating the payment due, meaning the entire remaining balance of the loan becomes immediately due and payable. This clause is crucial for lenders, as it provides them with a mechanism to mitigate losses when there is a risk that the borrower may continue to default. By invoking the acceleration clause, the lender can initiate the process for foreclosure or other collection efforts to recover the funds owed. In contrast, the default clause generally outlines the specific conditions that constitute a default but does not automatically give the lender the authority to demand full payment. The prepayment clause allows borrowers to pay off the loan early without penalties, and the liability clause typically relates to the borrower's responsibility for debt obligations but does not address payment in the context of defaults. Thus, the acceleration clause is the most appropriate and relevant clause for a lender to invoke when dealing with missed loan payments.

The acceleration clause is a provision in a mortgage or loan agreement that allows the lender to demand the full outstanding balance of the loan if the borrower defaults on the loan payments. When a borrower fails to make payments as specified in the loan agreement, this clause enables the lender to act quickly to protect their financial interest by accelerating the payment due, meaning the entire remaining balance of the loan becomes immediately due and payable.

This clause is crucial for lenders, as it provides them with a mechanism to mitigate losses when there is a risk that the borrower may continue to default. By invoking the acceleration clause, the lender can initiate the process for foreclosure or other collection efforts to recover the funds owed.

In contrast, the default clause generally outlines the specific conditions that constitute a default but does not automatically give the lender the authority to demand full payment. The prepayment clause allows borrowers to pay off the loan early without penalties, and the liability clause typically relates to the borrower's responsibility for debt obligations but does not address payment in the context of defaults. Thus, the acceleration clause is the most appropriate and relevant clause for a lender to invoke when dealing with missed loan payments.