Recourse or Non-Recourse Loans: What’s the Difference?

Recourse and Non-Recourse Loans: An Overview

A recourse loan enables a lender to track additional assets of a borrower who defaults when the balance of the debt exceeds the value of the collateral. A recourse loan allows the lender to seize only the collateral specified in the loan agreement, even if its value does not cover the entire debt.

Both types of loan can be secured. That is, the loan agreement stipulates that the lender can seize certain assets of the borrower and sell them to get their money back in the event of default.

However, a recourse claim gives the lender the ability to pursue additional assets of the borrower in addition to the value of the collateral if it is necessary to offset their losses on the loan.

Recourse Loans

Recourse loans have a lower interest rate than non-recourse loans. If the borrower does not meet his obligation and does not meet the payment plan, the lender will first confiscate and sell the collateral contained in the loan.

If this is not enough to repay the loan amount, the lender can search for the borrower’s other assets or sue the borrowers Seized wages.

From the lender’s point of view, a recourse loan reduces the potential risk associated with less creditworthy Borrower.

Because lenders can reduce the risk associated with these loans, they can charge a lower interest rate. This makes them more attractive to borrowers. It may be the only type of loan available to a borrower with a bad credit history.

These loans are most common when banks and other financial institutions start tightening their lending practices. When the economy is going through rocky times Credit markets are becoming more conservative, and lenders are raising their standards.

Examples of recourse loans

Most auto loans are recourse loans. If the borrower defaults, the lender can repossess the car and sell it at full market value. This amount can be less than the amount owed on the loan because of vehicles copy clearly in the first few years. If the loan is still sufficient, the lender can track the borrower’s other assets to collect the remainder of the debt.

Most mortgage loans are recourse loans, except in 12 states that prohibit homeownership recourse. These states are Alaska, Arizona, California, Connecticut, Idaho, Minnesota, North Carolina, North Dakota, Oregon, Texas, Utah, and Washington.

It’s important to note that in the event of default, lenders don’t always pursue assets beyond collateral, especially with individuals. Asset seizure is a time-consuming and expensive process, and a lender may write off a loss instead of pursuing it.

Non-recourse loans

Many banks don’t even offer non-recourse loans. It leaves them vulnerable to losses when their customers default on their credit and their collateral proves to be inadequate.

That is, if a balance falls due after the asset backed by the loan is sold, the lender must assume the loss. She is not entitled to any other money, property, or income from the borrower.

While potential borrowers may find it appealing to seek out no recourse loans, they usually come with higher interest rates and are reserved for individuals and businesses with outstanding credit Credit history.

Failure to pay a debt without recourse still incurs penalties, including loss of collateral and damage to the borrower’s creditworthiness.

Example of a no recourse loan

As mentioned earlier, many traditional banks avoid providing no recourse loans altogether.

However, an individual or company with an excellent credit history can convince a lender to agree to a no recourse loan. It comes with a higher interest rate. There may also be harsher conditions, such as B. a larger down payment for a house or a car.