Cross-Collateralization

Definition

Using assets pledged for one loan to secure multiple loans. It's a clever way for lenders to reduce risk and a way for borrowers to get tangled in interconnected debt.

Example Usage

The company cross-collateralized the building and equipment against three separate loans, meaning defaulting on any one would trigger default on all.

Origin

Modern lending practice developed in corporate finance, formalized in the 1980s-1990s

Fun Fact

Cross-collateralization can turn a minor default into a domino effect of cascading defaults—very effective for lenders, very dangerous for borrowers.

Source: Secured Lending Standards (UCC - Uniform Commercial Code)

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