Cross-Collateralization

Full definition

Cross-collateralization means a single piece of collateral secures multiple obligations with the same lender. This is most commonly encountered at credit unions but can appear in bank agreements as well. How it works: Scenario: You take out a $25,000 auto loan at ABC Credit Union, secured by your car. A year later, you take out a $5,000 personal loan at the same credit union. The personal loan agreement contains a cross-collateralization clause (also called a 'dragnet clause'). This clause means your car now serves as collateral for both loans. Even when you pay off the auto loan in full, ABC Credit Union may retain a security interest in your car until the personal loan is also paid in full. Why lenders use cross-collateralization: It provides additional security for unsecured or lightly secured loans without requiring additional collateral documentation. It reduces lender risk on personal loans that would otherwise be entirely unsecured. Why borrowers should watch for it: You may be unable to sell your car (or transfer a clear title) even after paying off the auto loan if a cross-collateral clause applies. This surprises many borrowers who expect a lien release after paying off the car. Cross-collateralization can also mean the credit union may offset deposits or seize the collateral if you default on any cross-collateralized loan. How to avoid it: Read loan agreements carefully, specifically looking for language about 'other obligations,' 'all sums owed,' or cross-collateralization. Ask the lender directly: 'Does this loan agreement cross-collateralize with my other loans here?' Some credit unions will remove this clause on request. Or use different lenders for secured and unsecured borrowing to avoid the issue entirely.

• Collateral
• Lien
• Credit union