Cross collateralization is the act of using an asset that’s collateral for an initial loan as collateral for a second loan. If the debtor is unable to make either loan’s scheduled repayments on time, the affected lenders can eventually force the liquidation of the asset and use the proceeds for repayment.
Also to know is, how does a cross collateral loan work?
Cross–collateralization is when one asset serves as collateral for more than one loan. If a borrower is unable to repay any of the loans secured by the asset, the property can be seized and sold even if the borrower is current on the remaining loans.
Subsequently, is cross collateralization legal?
Lenders cannot use your business’s property as collateral without your consent. Lenders obtain your consent to cross–collateralization through a dragnet clause, which may allow the lender to use the collateral for any loans or other obligations your business may owe the lender.