Legal Definitions - cross-collateral clause

A cross-collateral clause (sometimes also called a dragnet clause) is a specific provision found in a contract, typically an installment agreement, that significantly broadens the collateral a seller can claim if a buyer fails to make payments.

This clause allows a seller to use items previously purchased by the buyer from that same seller as security for a new purchase. If the buyer defaults on payments for *any* item bought under such an agreement, the seller can repossess not only the specific item associated with the default but also any other items previously purchased from them, provided there was still an outstanding balance on those prior items at the time the most recent purchase was made. Essentially, all items bought from that seller become linked and serve as collateral for all other items bought from them.

• Example 1: Furniture Store Purchases

  Imagine a customer buys a new living room sofa on an installment plan from "Comfort Home Furnishings." Six months later, they return to the same store and purchase a dining room set, also on an installment plan. Both contracts contain a cross-collateral clause. If the customer later stops making payments on the dining room set, Comfort Home Furnishings could potentially repossess both the dining room set *and* the living room sofa, because the sofa still had an outstanding balance when the dining room set was purchased.

• Example 2: Electronics Retailer

  A college student buys a new laptop on credit from "Tech Giant Electronics." A year later, they decide to upgrade their gaming setup and purchase a high-end monitor and a new gaming console from the same "Tech Giant" store, again using an installment plan. All three purchases are subject to a cross-collateral clause. If the student defaults on the payments for the gaming console, "Tech Giant Electronics" could repossess the console, the monitor, *and* the laptop, as the laptop and monitor still had balances due when the console was acquired.

• Example 3: Appliance Store Financing

  A homeowner finances a new refrigerator from "Reliable Appliances." A few months later, they decide to replace their old washing machine and dryer, purchasing these new appliances from "Reliable Appliances" on a separate financing agreement that includes a cross-collateral clause. If the homeowner defaults on the payments for the washing machine and dryer, "Reliable Appliances" could repossess all three appliances—the refrigerator, washing machine, and dryer—because the refrigerator still had an outstanding balance when the second set of appliances was purchased.