What does a cross-default clause achieve?

A cross-default clause is an important provision often included in loan agreements, particularly in the context of multiple loans or debts. This clause serves to link the default status of one loan to all other related loans. Therefore, if a borrower defaults on one loan, the cross-default clause automatically triggers a default on all other loans that are covered by that clause. This interconnectedness is designed to protect lenders by allowing them to take action (such as acceleration of repayment or enforcement of security interests) on all debts if one obligation is not met.

This mechanism effectively consolidates the risk for lenders, ensuring that they can address potential defaults proactively. Borrowers need to understand the implications of such a clause, as it means that financial difficulties in one area can lead to broader consequences across all loan agreements.

The other options, while related to loan management, do not specifically address the primary purpose of a cross-default clause, which is to create a unified default condition across multiple loans. Thus, they do not accurately capture the function described by the correct answer.