What are 'Accelerated Payments'

Accelerated payments is a term generally associated with making additional unscheduled payments on an invoice or non-revolving loan.

BREAKING DOWN 'Accelerated Payments'

Accelerated payments can be a consideration across all types of accounting methodologies. In business deals accelerated payments can help a company to mitigate accounting payment costs. In credit products the acceleration of payments will usually help a borrower lower their interest costs since extra payments will reduce the principal balance tracked by the lender in managing the product’s amortization schedule. In some situations, loan borrowers may have a limit on the accelerated payments they can make or they may incur a penalty for early repayment.

Amortization and Non-Revolving Loan Payments

The majority of non-revolving loans will have an amortization schedule that defines how much principal and interest will be paid with each scheduled payment so that the loan will be paid-off at the end of an established term. The amount of interest paid with each payment can be based on a fixed or variable interest rate. Each month’s payment will payoff differing amounts of principal and interest with interest decreasing over time. The higher the rate of interest on a loan, the more beneficial it can be to make accelerated payments.

Accelerated payments are payments that are made above and beyond the required monthly loan payment. Accelerated payments are typically applied to a loan’s principal which reduces the outstanding balance and required interest in future payments. Overall, more accelerated payments result in a faster principal payoff which can lead to substantial interest savings.

In mortgage loans, accelerated payments can be beneficial for increasing a borrower’s home equity. Accelerated payments can also help a borrower to more quickly obtain title rights to their secured real estate collateral which can simplify the process for resale.

Prepayment Penalties

A borrower seeking to aggressively payoff their loan balances using accelerated payments should seek loans that do not have any prepayment penalties. Lenders can institute prepayment penalties on all types of loans. Prepayment penalties include a fee for accelerated payments above a specified limit.

In mortgage lending a number of prepayment terms may apply. Some mortgage loans may set limits for annual accelerated payments. These lenders will typically only allow a borrower to payoff up to 20% of the loan balance per year. Often mortgage loans will also have provisions which institute prepayment penalties in situations that causes a change to the mortgage loan terms such as the sale of the collateral or a refinancing.

RELATED TERMS
  1. Amortization Schedule

    An amortization schedule is a complete schedule of periodic blended ...
  2. Down Payment

    A down payment is a type of payment made in cash during the onset ...
  3. Fully Amortizing Payment

    A fully amortizing payment is a periodic loan payment made according ...
  4. Deferred Interest Mortgage

    A deferred interest mortgage is a mortgage that allows for deferral ...
  5. Interest Due

    Interest due is the dollar amount required to pay the interest ...
  6. Payment Shock

    A payment shock is the risk that the payments due on a loan will ...
Related Articles
  1. IPF - Mortgage

    Understanding the Mortgage Payment Structure

    When you get a mortgage to buy a home, you need to understand the structure of your payments, so you know how expensive the whole thing will ultimately be.
  2. Personal Finance

    Time To Consolidate Your Student Loans?

    Use these strategies to decide whether consolidating your student loans makes sense for you – and what to do next if it does.
  3. Investing

    Financial Institutions: Stretched Too Thin?

    Find out how to evaluate a firm's loan portfolio to determine its financial health.
  4. Personal Finance

    Ways to Be Mortgage-Free Faster

    Getting rid of this debt faster has bigger benefits than you might think.
  5. Personal Finance

    How to Get a No Down Payment Mortgage

    There are only a few ways to get out of making a down payment, but the requirements are strict.
  6. Investing

    Commercial real estate loans

    Obtaining a commercial real estate loan is quite different from borrowing for residential real estate. Here's what to expect and how to get what you need.
  7. IPF - Mortgage

    How Interest Rates Work on a Mortgage

    A step-by-step explanation of the interest calculations, mortgage types and how the loan is eventually “retired” – which means paid off.
  8. Investing

    Getting Help With Your Down Payment

    It's not as easy as it once was to save for a down payment, but these tips can help give you a head start.
  9. Personal Finance

    Top 6 Mortgage Mistakes

    These common errors could end in foreclosure.
RELATED FAQS
  1. Are Student Loans Amortized?

    Student loans typically get paid back over time on a fixed payment, or amortized, schedule. Read Answer >>
  2. Fixed and variable rate loans: Which is better?

    Interest on variable interest rate loans move with market rates; interest on fixed rate loans will remain the same for that ... Read Answer >>
Trading Center