Cross-collateralization is a term used when the colateral for one loan or account is also used as collateral for another loan or account. If a person has borrowed from the same bank that they have home loan secured by the house through, or a car loan secured by the car, and so on, these assets can be used as cross-collateral for all the loans. Also if a person has an unsecured debt such as a personal loan or credit card with a creditor related to the bank that the individual has a checking or savings account with, the debt can be taken out of said account. Also if the person pays off the car loan and wants to sell the car, the bank may veto the deal because the car is still used to secure the home loan and other loans. Technically, cross-collateralization expires when the borrower has no outstanding loans with the bank. A cross-collateral provision is widely used by the banks to decrease risk.
If you have a checking account in a bank related to an unsecured debt it may be wise to close the account and move your money to an unrelated bank. It is important to close the account completely or the account may be overdrawn severely if left open; even in the least.
Cross-Collateralization is a very serious matter, and the information above is given as a warning; not all cases are the same. It is something to be very aware of so that you can protect your assets.
Cross-collateralization - To learn more about this author, visit Eric Pinola's Website.
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