Cross-collateralization is a term used when the

collateral Collateral may refer to: Business and finance * Collateral (finance), a borrower's pledge of specific property to a lender, to secure repayment of a loan * Marketing collateral, in marketing and sales Arts, entertainment, and media * ''Collate ...

for one

loan In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that d ...

is also used as collateral for another loan. If a person has borrowed from the same bank a home loan secured by the house, a car loan secured by the car, and so on, these assets can be used as cross-collaterals for all the loans. 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. In the context of

bankruptcy Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor ...

, cross-collateralization also means the collateralization of general unsecured prepetition debt by collateral securing postpetition loans. Another example of cross-collateralization occurs when an individual may have a

checking account A transaction account, also called a checking account, chequing account, current account, demand deposit account, or share draft account at credit unions, is a deposit account held at a bank or other financial institution. It is available to the ...

and a

at the same bank. If the individual becomes past due on the loan, the financial institution may take money out of the bank account or freeze the account until the loan becomes current. Because cross-collateralization reduces the lender's risk,

credit unions A credit union, a type of financial institution similar to a commercial bank, is a member-owned nonprofit financial cooperative. Credit unions generally provide services to members similar to retail banks, including deposit accounts, provision ...

often offer cross-collateralized loans as a way to give borrowers lower interest rates. Royalty advances paid by a publisher to authors of multiple books or to creators of multiple video games are often cross-collateralized; in book publishing this is sometimes called "basketing". In this scheme, the publisher pays no royalty checks to the creator until all of the books (or video games, or other works of authorship) have "earned out" their advances. In the movie industry, cross-collateralize clauses in production deals allow the funding studio to recoup a part of its losses for money losing films from hit films produced.

References

Credit Personal finance {{econ-stub