What is cross collateralization?

"Cross-Collateral" refers to a nasty provision contained in most credit union loan agreements. Some people call it a "Dragnet" clause. Regardless of what you call it, here is how it works.

If you borrow money from a credit union to buy a car or truck, the loan agreement you sign will list the car or truck as collateral for the loan. This much makes sense. The nasty part is this. That same loan agreement will usually also include a provision that reads more or less like this: "The collateral securing this loan shall also secure any and all other loans and accounts with the credit union." This means that the credit union is also putting a lien on the same car or truck, to secure all of your other loans and accounts with the credit union. The really nasty thing is that the credit union almost never tells your or its other members about this provision until it is too late. What happens is that, later on, when you finish paying off the loan obtained to buy the car or truck, or wish to sell the car or truck, because of the "cross collateral" language in your contract, the credit union does not have to give you back your title if you have any other outstanding loans and accounts with the credit union. At least not until such time as you pay, in full, all those loans and accounts. Credit unions can be pretty harsh in dealing with people who have caused the credit union to take any kind of loss, whether by filing bankruptcy or otherwise.

Unless and until you get a determination to the contrary from a lawyer, if you intend to keep a car or truck, where the credit union holds your title, you should assume that there is a "cross-collateral" clause in your agreements and that you need to keep paying on all loans and accounts you have with the same credit union.

"Cross collateral" provisions generally do NOT apply with respect to real estate. Therefore, if you have borrowed money from the credit union, and have given your house as collateral, most likely the credit union will not have the right to claim your house, by reason of "cross collateral" provisions, as collateral for any of your other loans or accounts with the credit union.

Need to how you can deal with the cross collateralization clause? Call to set up an appointment to deal with it today!