For decades, consumers have felt a need or some sense of loyalty to their bank. Back in the day when financial institutions had a real stake in the health of a community that may have been true. After all we all like to “belong” to something, some group. The credit card companies have made a big deal about “membership” even printing the term on their “elite” credit cards. I this suppose this is linked to our very human need to develop relationships with those we do business with and even the institutions that hold our possessions (money for the most part, but who also host “safe” deposit boxes.)
Banks, yes even the smaller local “community banks” are large financial institutions with the purpose of making money. Credit unions, which are often not-for-profit, are built with the intention of protecting the assets of the members. Either way, they are not in business to be your buddy. They are designed by their very nature to use assets to their highest and best use. This is not a cynical view point it is just down-to-earth reality.
One of the most common (and some would say devious) ways that many credit unions protect their assets is the practice of cross-collateralization, where one loan, say a credit card or home equity line of credit, is secured by the collateral of another loan–your car purchased using an auto loan, for instance. They almost always place a clause in their loan agreement that they have the right to extract from your deposit accounts (check, savings, CD or others) funds to satisfy the loan you may have with them.
Here’s a piece from Fox Business News
Many consumers may not realize that the car they’re financing through their credit union also could be used as collateral not only for their auto loan, but for another debt, such as a credit card.
So if you borrow money from your credit union for that new Toyota Camry today, then run into financial trouble two years down the road and stop paying on your credit card, the credit union can have someone come and “tow your car away,” says Terry Duncan, a bankruptcy attorney with Duncan Law in Charlotte, N.C.
It’s a practice called “cross-collateralization,” and while banks also may have such clauses in their loan documents, the practice is much more typical with credit unions, Duncan says.
“It’s a fairly common clause in credit union loan documents” as the credit unions try to “make loans less risky for them,” says Mike McClain, assistant general counsel and senior compliance counsel with the Credit Union National Association (CUNA).
Don’t think it will happen to you? Don’t be so sure. A homeowner is working through a short sale, they watched as their credit union repossessed their truck. The homeowners were not behind on their truck payment, which was through the same credit union, but they were behind on their home equity line of credit (HELOC). Through the cross-collateralization clause of their HELOC, the credit union towed their truck away to make good on their home equity line. The threat–make that the promise–of repossession is real.
At the least, Keith Leggett, senior economist and vice president for the American Bankers Association, suggests asking the financial institution if a cross-collateralization clause is involved.
And you may want to think hard about borrowing money from the same place you have bank or credit card accounts. While there’s nothing wrong with it if you have your financial house in order, and you may receive better interest rates on loans, it could become problematic if you run into financial difficulties, Dorothy Barrick, group manager and financial counselor at the nonprofit GreenPath Debt Solutions says.
“Sometimes it’s not a good idea to bank where you’re borrowing money,” Barrick says.
I agree with the last statement, particularly when it comes to dealing with home mortgages, although I must say I’ve not seen any financial benefit to financing through one’s bank as Barrick suggests. Use a lender that specializes in home mortgages, not your bank. Think of it as diversifying your credit lines. It’s best to not have all your eggs in one basket, especially if the bank or credit union can take your basket.