Imagine a scenario where you are ready to sell your car that you now own, freely and clearly, only to be heard by your lender that you cannot sell it until you have repaid another non-guaranteed loan with the same lender. In essence, you are told by the lender that you are not paying for your car and the title is still owned by the lender. This is the result of an obscure clause, called cross-collateralization, used by lenders in certain lending situations. You may not be aware of it unless you have carefully dissected your contract to have it buried deep in the fine print. Even if it was explained by your lender, chances are that it would have long been forgotten by the time you were in your loan for three or four years, and that is why most borrowers are overwhelmed.
What is a cross-collateral loan?
Cross-collateralization is a method used by lenders to use the collateral of a loan, such as a car, to get a new loan that you have with the lender. Although that seems to be a reasonable precaution of the lender, borrowers often do not realize how much control the lender has over his finances when exercised. It is possible that you can sell your car if the lender wants you to keep it as collateral. Even worse, if you fall behind on another unsecured loan, such as a credit card, the lender can take back your car. If you are filing for Chapter 7 bankruptcy, you may have to hand over your car to the lender until your outstanding debts are settled.
Credit Union Practices
Although cross-collateral loans are widely used for car loans, these loans are much more common with credit unions. Credit unions work differently from banks because they are owned by their members, so the clause is an additional protection against credit losses that would be shared by members. The attraction of credit unions has always been their willingness to extend more favorable loan conditions, especially when you have an existing relationship with them. If you are financing a car through a credit association or have a savings account with you, you will probably receive Panucreditlark offers for low unsecured loans. This is because credit unions can secure these loans with the collateral of your car loan or savings.
For various reasons, credit unions are an attractive alternative to banks and loans, including lower bank and financing costs. The practice of cross-collateralization can be a disadvantage if you are not aware of the possible impact on your finances. If you are considering a loan from a credit association, it is important to take a few precautions. First, do not take more than one loan from a credit union at a time. Second, do not establish a credit card account or credit line where you have a car loan. Third, do not bank where you borrow; keep your checking account with another institution. Finally, always read the fine print on every loan document.
Cross-Collateral Loans in Mortgage Lending
Cross-collateral loans are also used for mortgage loans, primarily with building loans when a borrower owns multiple objects. For example, if a builder who owns more than two objects seeks financing for a new project, the lender can secure the new loan by placing a lien on one or more of the other objects. The lender becomes the senior pledgee on all properties, making them difficult to sell.
As with any form of credit, whether it is credit cards, installment loans, credit lines or mortgages, the burden is always for the borrower to understand every aspect of the credit terms that are primarily written to maximize the income of the lender. and protect it against losses.