Fail to meet the terms of your loan and late charges are the least of your worries. If your loan contains a call provision, the bank has the right to demand full payment. Usually this happens if you fail to meet specific criteria, so there’s no need to sweat it out from closing to payoff. Just make sure you understand the terms of your loan agreement to avoid any unpleasant surprises.
A callable loan gives the bank the right to demand immediate payment in full. This may not seem fair and, while there are questions on the ethics of call provisions, they’re perfectly legal. This doesn’t mean you have to live with the constant threat of the bank demanding full payment of your loan. Calling a loan can be a costly process for the bank, especially if it calls a loan you can’t repay. Banks often exercise a call provision as a last resort due to a breach of terms.
There are two common types of call provisions, a demand loan and a term call option. Some demand loans, typically one-year lines of credit, have expiration dates. The loan will expire on a set date, but the bank has the right to call the loan at any point. Other demand loans don’t have an expiration date. You make monthly interest payments and pay down principal when possible. The bank can demand full repayment at any time. A term call option means the bank reviews your loan in intervals, every five years on a 25-year term, for example. The bank has the right to demand payment at each interval rather than continuing the loan.
Documentation varies depending on the bank and the type of loan. While the sheer number of documents can be overwhelming, you just need to know what to look for. Call provisions are found in the promissory note or the loan agreement. The call provision will appear as its own section and detail the exact conditions under which the lender can call the loan. Unless you’re a lawyer or have lending experience, it’s a good idea to have your attorney review these documents before closing. Once you sign those papers, good luck trying to negotiate the call provision, because you’re going to need it.
Make no mistake, call provisions exist to protect the bank. While it can be difficult to recoup the balance, a bank that calls a loan has made the decision that it’s better to force you to pay now than to continue the loan. A common reason to call a loan is for non-payment. On loans with term call provisions, the bank will review your financial information to decide if it wants to continue. For example, if you have a 25-year loan with a five-year call provision, the bank will review the loan and your finances. If it sees deterioration, it may demand payment rather than renewing the loan for the next five-year period.