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What Are Cross-Collateralized Loans & How Do They Work?

Cross-Collateral Loans - How They Work
Austin Kilham
Austin KilhamUpdated March 19, 2025
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Cross-collateralized loans are a financing arrangement where a single asset is used as collateral for multiple loans, or multiple assets secure one loan. This structure allows lenders to reduce their risk, often leading to better loan terms, lower interest rates, or higher borrowing limits for the borrower.However, it also means that if the borrower defaults on one loan, the lender has the right to seize the collateral, even if the other loans are in good standing. Keep reading for more on cross-collaterized loans, including how they work, pros and cons, and alternatives to cross-collaterized loans.

What Does Cross-Collateralization Mean?

Cross-collateralization is when a lender uses one asset to secure two different loans. For example, your car could be the collateral to secure an auto loan, and then also be used to secure a second loan you take out with that lender. Cross-collateralization may be used for a variety of loans, including mortgage loans, personal loans, auto loans, and credit card debt. While cross-collateralization can be beneficial in securing necessary funding, it can also limit a borrower’s flexibility, making it harder to sell or refinance assets tied to multiple debts.Recommended: What Can and Can’t Be Used as Collateral

How Cross-Collateralized Loans Work

A secured loan is one that is backed by collateral, which is an asset like a house or car. If a borrower fails to pay back the loan, the lender can seize the collateral and sell it to recoup some of their losses. With cross-collateralized loans, even if you pay off the first loan, the collateral for that loan is still used to secure the second. If you fail to pay off the second loan, you could lose your asset.

Pros and Cons of Cross-Collateralized Loans

Understanding the pros and cons of cross-collateralized loans is essential before committing, as they can impact both short-term financial decisions and long-term asset management. Below, we explore the key pros and cons of cross-collateralized loans.

Pros of Cross-Collateralized Loans

  • Lower interest rates: Lenders may offer better rates since the loan is secured by multiple assets.
  • Higher borrowing limits: Using multiple assets as collateral can increase the amount you’re eligible to borrow.
  • Easier loan approval: Cross-collateralization reduces lender risk, making approval more likely, especially for borrowers with limited credit history.
  • Flexible loan terms: Lenders may provide better repayment terms, such as longer repayment periods or lower monthly payments.

Cons of Cross-Collateralized Loans

  • Increased risk of asset loss: If you default on one loan, multiple assets could be repossessed, even if other loans are current.
  • Reduced asset flexibility: Selling or refinancing an asset used as collateral can be difficult, as it is tied to multiple loans.
  • Complex loan agreements: Borrowers must carefully review terms to avoid unexpected consequences or restrictions.
  • Limited future borrowing power: Assets already pledged as collateral may not be available for future financing.
Recommended: Personal Loans: The Pros and Cons Explained

Cross-Collateralization and Bankruptcy

Cross-collateralization can significantly impact bankruptcy proceedings, as it complicates the separation of debts and assets. In a bankruptcy filing, lenders with cross-collateralized loans have a stronger claim over multiple assets, meaning they may seize collateral even if the borrower seeks to discharge certain debts.This can make it more difficult for individuals or businesses to protect assets during bankruptcy, as secured creditors may demand repayment or liquidation of collateral before any debt relief is granted. Additionally, in Chapter 7 bankruptcy, cross-collateralized loans may force borrowers to either reaffirm debts or risk losing important assets.Recommended: Debt Settlement vs Bankruptcy

Cross-Collateral Loans in Mortgage Lending

Cross collateralization can be used in mortgage lending. For example, a borrower with a mortgage on their primary residence might use their home as collateral to buy an investment property. The loan is then secured by both the investment property and the borrower’s home, which may be viewed more favorably by lenders since there are essentially two properties securing the loan against default. This extra security could mean that the borrower is more likely to get the loan on the second property approved, and they might receive a better offer for terms and interest rate. Recommended: Mortgages vs Personal Loans

Alternatives to Cross-Collateralized Loans

Cross-collateralization is not always necessary for those seeking loans. Here’s a look at some alternatives. 

Unsecured Personal Loans

Most personal loans are unsecured, meaning they don’t require collateral. With these loans, banks, credit unions, and online lenders will offer a loan amount, which borrowers agree to repay at regular intervals with interest. A borrower’s ability to qualify for loans and receive the lowest interest rates will depend largely on their credit history and credit score. Those with higher scores tend to qualify for loans with the most favorable interest rates. Because borrowers with lower scores are seen by lenders as more likely to default on their loans, lenders tend to offer higher interest rates to those borrowers.

Secured Personal Loans

Secured personal loans, on the other hand, do require collateral. Collateral could be cash in a savings account, a car, or a home. It may be easier for borrowers with poor credit to qualify for secured loans and receive lower interest rates.  

Joint Personal Loans

If you’re applying for a personal loan as a duo, you may consider a joint personal loan. These loans involve two borrowers who are equally responsible for the loan. When applying for a joint personal loan, your lender will look at both applicants' credit histories. Both of you will have equal rights to the loan funds.Joint borrowers are not the same as cosigners on personal loans, who take responsibility for paying off the loan, but do not have access to loan funds.  

Home Equity Line of Credit

A home equity line of credit, or HELOC, is a form of revolving credit that uses your home as collateral. You can borrow up to a certain credit limit, which is restored as you repay your debt. It’s important to be careful with loans that use your home as collateral. If you default on them, you could end up losing your home. 

Compare Personal Loan Rates With Lantern

If you’re in the market for a personal loan, you’ll want to shop around for one that will provide you with the lowest interest rate and terms to meet your needs. Lantern by SoFi can help you compare loan rates and apply for personal loan rates in minutes.

Frequently Asked Questions

Is cross-collateralization bad?
Can you get out of cross-collateralization?
Is cross-collateralization legal?
Photo credit: iStock/Nuthawut Somsuk
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About the Author

Austin Kilham

Austin Kilham

Austin Kilham is a writer and journalist based in Los Angeles. He focuses on personal finance, retirement, business, and health care with an eye toward helping others understand complex topics.
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