What Is a Set-Off Clause?


The set-off provision is legal right which allows a lender confiscate your financial assets if you fail to pay the loan.

The set-off provision is legal stipulation that permits a lender to take your assets in the event that you fail to pay back the loan. This clause is usually found in the loan agreement in particular when there’s an opportunity that the borrower will not pay back the loan they are owed.

Definition and Examples of Set-Off Clauses

A set-off clause is a term used to describe a clause that allows your lender to take your deposit or other assets in the event that you do not pay back the loan. The specific structure of the clause may differ however they are typically utilized in loans that are not secured.


Set-off clauses don’t only apply to consumer loans. These clauses may also pop in contracts for business.

The set-off clause comes into effect in the event that you fail to comply with conditions of your contract. With a set-off clause both the borrower and lender agree on what should occur if the borrower fails to pay back the loan.

However they aren’t included in every contract. It’s generally added to a contract when a lender believes that a borrower is high-risk.

  • Alternative Definition: The set-off provision can be described as legal in a contract to protect the lender
  • Name of alternative“Bank set-off”

As an example, suppose you are requesting the loan through the local bank in which you have an account for checking. After you have read through the loan agreement prior to signing it, you will notice a clause that says the bank will take money from your account if you fail to pay and this is known as an agreement to set-off.


Banks can’t use set-offs to take income exempted under federal or state laws 1. or to pay for late payments on credit cards in the event that you have not authorized it.


How Does a Set-Off Clause Work?

A set-off clause stipulates that if a borrower fails to pay in a repayment, the loaner is entitled to the power to seize the assets specifically mentioned by the agreement. This decreases the risk a lender has to take on since it guarantees that they get a share of the debt due to them.

To allow a lender or bank to utilize the set-off provision, it must satisfy the following conditions:

  • The debt is due which means that the debtor is believed to be in default.
  • The bank is able to transfer funds directly to the account of the borrower.
  • The account that the bank will take the money from is the account that the borrower used to pay for the loan.

If the lender is planning to transfer funds to other banks, it needs to be specified within the clause for set-off. Even when the funds aren’t available to banks A set-off clause allows your bank the ability to access other accounts.

Contracts with set-off clauses will contain the clause in the loan agreement. Find terms such as “Rights for Set-Off.”


Certain states impose specific set-off clauses. For example, California prohibits set-offs if the amount of your accounts exceeds $1,000. 


Benefits of Set-Off Clauses

A set-off clause is advantageous to the lender in the event that the borrower fails to pay the loan the lender is protected.

Another advantage is that it could permit an institution to receive more than what it could receive through bankruptcy procedures. With a set-off provision, lenders could be able to receive a payment equal to the amount that borrowers owe.

Key Takeaways

  • A set-off clause is a lawful clause that safeguards the lender.
  • It says that if a borrower fails to pay on the loan the lender has the legal right to take over the assets of the borrower.
  • Through a set-off provision The lender guarantees that they will be able to redeem more funds than they could get through bankruptcy.
  • Set-off clauses are frequently utilized in loan contracts for businesses and consumers.
the authorAaron Krause

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