Legal Definitions - cross-collateral

Cross-collateral refers to a legal arrangement where an asset or group of assets pledged as security for one loan or debt is also used to secure other, separate loans or debts owed to the same lender. This means that if a borrower defaults on any of the linked obligations, the lender can claim all the cross-collateralized assets to satisfy the outstanding debts. It effectively ties multiple financial agreements together, making the collateral for one agreement serve as security for all others under the cross-collateral agreement.

• Example 1: Business Financing

  A small manufacturing company takes out an initial loan from a bank to purchase specialized machinery. The machinery itself serves as collateral for this equipment loan. A year later, the same company needs a separate line of credit from the same bank to manage its operational cash flow. The bank includes a cross-collateral clause in the line of credit agreement, stipulating that the machinery (originally collateral for the equipment loan) now also secures the line of credit. If the company defaults on the line of credit, the bank can seize the machinery, even if the payments on the original equipment loan are current.

• Example 2: Consumer Loans

  A person obtains a car loan from a credit union, with the vehicle serving as collateral. Several months later, the same individual takes out a personal loan from the same credit union to cover unexpected medical expenses. The personal loan agreement contains a cross-collateral provision, meaning the car (which is collateral for the car loan) now also secures the personal loan. If the individual defaults on the personal loan, the credit union could repossess the car, even if all payments for the car loan itself are up to date.

• Example 3: Real Estate Development

  A property developer secures a construction loan from a bank to build a residential complex on Parcel A. Parcel A and the improvements built upon it are the primary collateral. Subsequently, the developer secures a second, separate loan from the same bank to acquire and develop an adjacent Parcel B for a future phase. The bank's loan documents for both projects include a cross-collateral clause, making both Parcel A (with its completed complex) and Parcel B (with its ongoing development) collateral for both loans. If the developer defaults on the loan for Parcel B, the bank could potentially seize both Parcel A and Parcel B to recover its losses from either or both defaulted loans.