Due-on-sale Clause Definition

A due-on-sale clause is a contractual clause in many secured loans specifying that all owed monies become immediately due upon sale of the relevant asset. The clause is intended to prevent a secured loan from becoming a de facto unsecured loan. For example, you borrow $2,000 and put up your automobile as collateral; when you later sell your automobile, you are required to immediately pay back the remainder of the borrowed money. This prevents the bank for holding a loan secured against a non-existent automobile. Due-on-sale clauses are commonly attached to any form of secured loan that has a tangible commodity asset specified as collateral.