A dragnet clause, sometimes called a cross-collateralization clause, is a common feature in loan agreements where the collateral tied to one loan also secures any other debts you owe to the same lender. For example, if you loan your car to secure an auto loan that contains a dragnet clause, the lender can claim that car to cover defaults on unrelated debts like personal loans or credit cards held with that lender.
This clause essentially links all your loans and accounts at one lender, allowing them to “drag” your collateral across your entire debt portfolio with them. While this increases the lender’s ability to recover funds in case of default, it also exposes borrowers to the risk of losing important assets for debts they might not expect to be connected.
Dragnet clauses frequently appear in loan agreements from credit unions, auto loans, business loans, personal loans, and home equity lines of credit (HELOCs). Because credit unions typically view a member’s financial relationship holistically, these clauses are more prevalent in that setting.
The risks for borrowers include losing collateral for unrelated debts, difficulty in collateral release when paying off individual loans, and potentially reduced borrowing flexibility. Lenders benefit from increased security, reduced loss risk, and streamlined collection processes.
To protect yourself, carefully review loan documents for terms like “cross-collateralization,” “any and all debts,” or “past, present, or future debts.” Ask lenders directly about such clauses and negotiate their removal or limitations if possible. Alternately, you can separate your loans across different financial institutions to prevent cross-collateralization.
For a deeper understanding of collateral in lending, you can explore our detailed guide on Real Estate Collateral and Cross-Collateralization of Liens.
Dragnet clauses are legal and enforceable in most cases but are often narrowly interpreted by courts due to their lender-favoring nature. Always stay informed, read all loan agreement terms carefully, and consider legal advice if unsure.
For official guidance on loan agreements, visit the Consumer Financial Protection Bureau.
