What does cross-collateralization refer to?

Study for the nCino Business Value Exam. Explore flashcards and multiple choice questions, complete with hints and explanations. Prepare for success!

Cross-collateralization refers to the practice of pledging a single piece of collateral to secure multiple loans. This means that if a borrower has several loans and uses the same asset (such as real estate or equipment) to back them up, that asset serves as collateral for all those loans. This arrangement provides lenders with greater security because they can claim the collateral in the event of default across any of the loans associated with it.

By using one collateral for multiple loans, borrowers might benefit from better loan terms or easier access to credit, but they also risk losing that collateral if they default on any one of those loans. This understanding of cross-collateralization is crucial in the context of lending, as it highlights both the advantages for borrowers in leveraging their assets and the heightened risks involved regarding their obligations to various lenders.

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