Ried Rants

There is a little known clause of a contract that you may sign with your Credit Union.  It is a sneaky provision that most people don’t understand and have no idea that they have agreed to.  It is called cross collateralization clause and it is on your loan agreement executed through you credit union. 

As you may know many people do not read or care to read the fine print in an agreement and that they sign.  Even if you do happen to read the fine print it is rare that the language in the document or agreement is understandable by a lay person.

The most common scenario of cross collateralization (“CC”) is when you take out a loan to purchase a vehicle.  The CC provision will be automatically added to the auto loan paperwork.  And it basically states that you agree that any unsecured debt (credit cards) that you hold with that same credit union are attached to the new auto loan. 

Meaning, that if you have a $20,000 car loan and $10,000 in credit card debt that once your car loan is paid off you will not gain title to the vehicle until ALL of the $10,000/debt on your revolving account is paid in full.  Even if you have no credit cards with that credit union open at the time you execute the auto loan they will attach any credit card you get from that credit union to the auto loan in the future.

This also causes a difficult situation, in light of the present economy, because many people are filing for bankruptcy protection.  You see the CC clause effectively makes credit card debt held at the same credit union non dischargeable i.e. you will have to pay the credit card AND the auto loan if you plan on keeping the auto.  This clause is designed so that credit unions have less of a chance to lose money that is lent under a revolving credit agreement.

The only way that you can get around this trickery is to have owned the auto for at least 910 days with that lender (in Florida) if you are filing for bankruptcy protection. 

Your best bet is to keep your loan account(s) separate from your deposit account(s) to protect your money from the CC clause. 

Even if you use a non credit union financial institution keep your money separate.  Because of another little known clause that allows the mortgage lender the right to sweep (take all your money from savings and checking) to pay any and all mortgage amounts that are in arrears there are held at that same institution.

In a nutshell:

-  if your lender holds your mortgage and you have checking and/or savings accounts at the same place they can take your money to pay the mortgage you promised you would pay.

-  if your credit union holds your auto loan and you have credit card(s) with them you have secured the credit cards with the auto and the auto will not be yours until you pay off both.

It is no small wonder why people did not keep their money in the bank during hard times.