Cross Default Covenant
Cross default is a provision in a bond indenture or loan agreement that puts a borrower in default if the borrower defaults on another obligation. Simply put, if you take a housing loan from Bank A repayable yearly for 5 years at a fixed interest rate, you are liable to pay the installments at the end of the year. However, if you have also taken some other kinds of loans, say for example, car loan from Bank B, and end up defaulting on that, Bank A will ask you to pay the rest of your amount immediately instead of waiting for the loan term to end.
So, a default on one loan becomes a trigger factor for the repayment of the other loans that you have taken.
Why? The answer is a question.
What guarantee does Bank A have of you paying up their money and not running away when you are struggling to pay up to Bank B right now?
Better to get paid now rather than wait and cry later on. Cut your losses short.
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