What’s the Difference Between a Recourse and a Non-Recourse Loan?
Recourse and non-recourse loans differ primarily in the extent of the borrower’s liability and what assets a lender can claim if the borrower defaults.
Recourse Loan:
A recourse loan allows the lender to pursue the borrower’s additional assets beyond the collateral if the collateral’s value does not fully cover the outstanding debt after default. This means the borrower is personally liable for the full loan amount. Lenders can legally go after other assets such as bank accounts, property, or wages to recover the balance.
Non-Recourse Loan:
A non-recourse loan limits the lender’s claim strictly to the collateral specified in the loan agreement. If the collateral value falls short of the loan balance upon default, the lender cannot pursue the borrower’s other assets. The borrower’s personal liability is generally limited to forfeiting the collateral only.
How Do Lenders Use These Loan Types?
Lenders prefer recourse loans as they reduce their credit risk. Recourse loans are common for most personal and business financing.
Non-recourse loans provide borrowers with more protection but come with stricter approval criteria, higher interest rates, and often require higher-value collateral. They are frequently used in commercial real estate loans, project finance, or specialized lending where collateral quality is high.
FAQ – FREQUENTLY ASKED QUESTIONS
What happens if I default on a recourse loan?
The lender first seizes the collateral. If collateral value is insufficient, the lender can pursue your other assets or income to recover the remaining debt.
Can a lender seize personal assets in a non-recourse loan if I default?
No. In a non-recourse loan, the lender can seize only the collateral agreed upon at loan origination. Personal assets are protected.
Are non-recourse loans more expensive?
Typically yes, because the lender takes on more risk, they often charge higher interest rates and impose stricter eligibility conditions.
Which loan type is better for borrowers?
Non-recourse loans provide greater protection by limiting personal liability, but because they are harder to qualify for and more expensive, recourse loans are more common for everyday borrowers.
Can recourse loans have collateral?
Yes, recourse loans can be secured by collateral, but unlike non-recourse loans, the lender is not limited to only accepting the collateral if default occurs.
Are all mortgages recourse or non-recourse loans?
Mortgages can be either, depending on local laws and lender policies. Many mortgages are recourse loans, allowing lenders to pursue borrower assets if foreclosure sale does not cover the full debt.
Published on: July 24, 2025
Published by: PAVAN
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