What is Cross-Collateralization?

Financing_imageYou may have run across the term cross-collateralization if you are looking for an auto loan with a credit union instead of a bank, but you may not be familiar with the term. What is cross-collateralization? And what do you need to know about it?

Collateral in a loan is security for the lender. If the borrower puts up collateral for the loan, it means the lender can take the collateral if the borrower fails to pay the loan back.

That means cross-collateralization is when collateral for one loan can be used as the collateral for another loan as well. For example, a home loan and an auto loan can be used as cross-collateral for one another if they are borrowed from the same lender.

The problem with cross-collateralization is that you can have property seized from you if you fail to pay. You could pay your auto loan completely, but your car could still be taken for failure to pay your home loan or others loans you may have. A credit union could also prevent you from selling your vehicle if it is being used as collateral for other loans.

Stay informed about the different parts of a loan and never sign anything unless you fully understand it! It is best to consider all your options for financing before you pick one.

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