What can be a consequence of violating a loan covenant?

Violating a loan covenant can lead to significant repercussions for the borrower, which is why the possibility of loan default or penalties is a fitting consequence. Loan covenants are legally binding agreements that stipulate certain financial and operational behaviors a borrower must maintain while the loan is active. If these covenants are breached, lenders often reserve the right to impose penalties or accelerate the loan, leading to immediate repayment demands. This breach may also trigger technical defaults which could result in extensive legal or financial consequences for the borrower. Therefore, recognizing that a violation could lead directly to a loan default or the imposition of penalties accurately reflects the risks associated with covenant breaches.