What is Cross-Collateralization and How Does It Work?

Cross-collateralization can be a powerful tool, letting you use an asset — like your house, car or savings account — to reduce your interest rate on multiple loans. However, the trade off is you’re putting that one asset at a greater risk. Depending on what you use as collateral, the lender could possibly foreclose on your house, repossess your car, pull directly from your savings account or charge your credit card.

How cross-collateralization works

Both individual consumers and businesses can use cross-collateralization to lower the cost of borrowing money. Lenders use it to be able to offer more competitive rates and attract customers.
Types of loans that can be cross-collateralized include:

• Mortgages – single and multifamily
• Personal loans
• Commercial loans
• Credit cards
• Investment loans

Some lenders may have cross-collateralization as an available option while others include it automatically as a required clause on their loans. Credit unions are known for using cross-collateralization often and have received some bad press for their borrowers not realizing the full risks. It’s always smart to read the fine print and ask a loan officer to answer plainly any questions you have.

Benefits and risks of cross-collateralization

Cross-collateralization benefits

By using cross-collateralization, you can typically qualify for a lower interest rate on debt products like personal loans, credit cards and commercial loans. And you won’t have to purchase another asset — you can use one that you already have.

Cross-collateralization risks

The downside is that if you default on the loan, the lender has the right to repossess or sell the asset. For example, if you face financial stress and decide to make your car and your mortgage payment, but default on your credit card — and you forget that you used your car as collateral on your credit card — your credit card issuer could repossess your car for nonpayment of your credit card debt, even though you’re making your car loan payments.

Cross-collateralization and bankruptcy: What to know

When you file for bankruptcy, most of your debt can generally be discharged. However, for any debt that’s secured with an asset, you must give up the collateral before the debt can be discharged. Cross-collateralization can require you to not just pay off your mortgage in order to keep your home, but also your credit card or personal loan, which may be too much to handle.

Here’s how to get a mortgage after bankruptcy.

How to avoid a cross-collateral loan

Ask the loan officer and read the small print to be sure that the lending agreement you’re considering doesn’t include any cross-collateral agreements. In a contract you may see cross-collateralization referred to as “security interests” and specifically mentioned in the loan contract’s Truth in Lending Disclosure.

If you’d like greater peace of mind, consider hiring a lawyer. A contract lawyer or a real estate attorney could provide the expertise you need.

How to get a cross-collateral loan

If you do want a cross-collateral loan, consider borrowing from a credit union, purposefully searching for one online or talking with a loan officer.

Alternatives to a cross-collateral loan

If you’re after the main benefit of a cross-collateralized loan — a lower interest rate — but you don’t want to put up an asset as the security for multiple loans, here are some other options:

• Improve your credit score
• Get a cosigner on your personal loan, auto loan or mortgage
• Save up a larger down payment
• Look into down payment assistance programs

And don’t underestimate the power of simply asking for a lower interest rate: A LendingTree survey found that 81% of borrowers who asked for lower credit card APRs were successful.

Shopping around for the best interest rate and getting multiple offers on your preferred loan type is one of the best things you can do as a consumer to ensure you’re getting the best deal.

Cross-collateralization FAQs

Is cross-collateralization bad?

Cross-collateralization is a tool. It can be good when the borrower receives the benefits (like a discounted interest rate) and is fully aware of the risks — but it can be bad when a borrower is taking risks they’re not aware of.

What is cross-collateralization in real estate? 

Cross-collateralization in real estate can occur in two ways: When a borrower uses a non-real estate asset to secure a real estate loan, or when a borrower uses real estate to secure a loan.

Is cross-collateralization legal?

Yes, in general, cross-collateralization is legally allowed.

Can banks offer cross-collateralization?

Yes, banks and other financial institutions can offer cross-collateralized loans and debt products.

How do I get out of cross-collateralization?

To get out a cross-collateralized loan, you’ll need to pay off the loan. You can do this by paying it off over time, paying it off in a lump sum or refinancing it to a non-cross-collateralized loan.