What is Cross Collateralization?

Cross-collateralization refers to the act of utilizing an asset as collateral in a loan, and that asset is currently used as collateral for another loan.

How Does Cross Collateralization Work?

Cross-collateral refers to a method that lenders use to utilize the collateral of a loan such as a car to secure a second loan that an individual may have with the lender. When an asset is cross-collateralized, it brings up issues as to which secured party has priority to the asset in the event of default.

Collateral cross loans can also be used in mortgage loans especially with construction loans where a borrower has multiple properties. For instance, if a building constructor who has more than two properties wants to be financed for an upcoming project, the lender may decide to fix the new loan where they may place a lien against one or more of the builder’s properties. The lender also becomes the high-level lien, particularly on all properties. This makes it complex for the parties to sell.