Credit Unions and Cross-Collateralization of Loans

Borrowing money is seldom a simple process. You may need to go to several lenders before you are approved for a loan, and by the time the process is completed you are so relieved to be getting the money that you sign the documents without reading them. Don’t be embarrassed because you are not the only one to make this mistake. Hopefully there is nothing in the contract that creates future financial trouble, but if you are borrowing from a credit union you may live to regret not reading that contract.

If you had read the contract you might have asked what the term “cross-collateralized” means. Credit unions have the ability to cross-collateralize loans, meaning that unsecured loans like credit cards may be secured by the collateral for other secured loans. Here is an example. John bought a car for $10,000.00 and financed the purchase through a credit union. He also has a credit card with a balance of $1,500.00. A year later, he has made twelve payments on the auto loan and the balance owed is $8,000.00. The car is worth $12,000.00. John can’t afford to pay his credit card payment one month. Usually when you don’t pay a credit card the lender calls you, sends you a nasty letter, charges you fees, and raises your interest rate. But in John’s case the credit union repossesses his car.

Unfortunately, the car loan and the credit card debt are cross-collateralized. This means that the unsecured credit card isn’t unsecured after all. It is secured by any collateral for any other loan John has with the credit union or takes out with the credit union in the future. If you are borrowing money make sure to read the contract carefully. If you see the phrase “cross-collateralized, don’t take out any other loans with that particular lender, and cross-collateralization probably won’t be an issue. But if you do take out a credit card with the same lender, make sure you pay your bill, or you may lose your car.