Banking and financing with one institution is convenient, but there could be unforeseen issues with letting one institution handle all your financing needs. Banking with one institution does seem to be stress-free. You can easily pay all of your loans online and transfer funds easily, and in theory, you are often dealing with the same individuals time after time. But, what you may not have realized is if you have secured loans and unsecured loans with the same institution, the lender may have collateralized your new loans to the same collateral.
What Cross Collateralization Is
This is called cross collateralization. It is a way for a lender to mitigate their losses. For example: if you have a car loan with a credit union and have been making regular payments and now have some equity in the vehicle (meaning the amount owed on the vehicle is less than the current value of the vehicle) and you apply for a loan with the same credit union, they could secure that new loan to the existing collateral you have with them (your vehicle). Usually, this term is in the fine print of the loan agreement. The agreement effectively states that all of your accounts/loans with the credit union are connected and if you default on any loan with the credit union your collateral will be in jeopardy.
What You Don't Know
Because these agreements are in the fine print many debtors do not know about the cross collateralization until they begin the bankruptcy process. What some debtors come to realize is that their $8,000 vehicle loan is actually a $13,000 vehicle loan because of what they believed to be unsecured debt is actually secured to their vehicle. In a bankruptcy the secured debt is not discharged, and for the debtor to retain their vehicle and obtain a clean title, the full amount of the secured loan would need to be paid. In short, the debtor would pay the original vehicle loan and the amount of the new loan that was cross collateralized to the vehicle in order to keep the collateral.
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