What is Recourse Loan?

A recourse loan is a loan (debt) that helps the lenders to regain their investment when a borrower fails to pay back, and the underlying asset’s value is not sufficient to cover the due amount. The term recourse loan is considered as a form of secured financing. It allows the lender to go for other assets of the debtor that were not part of loan collateral, or a lender can take legal action in the condition of a default to settle the full debt.

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Understanding Recourse Loan

The recourse loans also called as recourse debt as it refers to a particular loan type that makes a borrower hundred percent liable for any outstanding amount (balance). The recourse loans need collateral because they are treated as secured loans. The collateral can be any asset that is possessed by the lender as a security for providing a loan and can sell the asset in the case of any losses in order to recover it. If the amount of loan is more than the market value of an asset (collateral), the lender has the rights to go after the borrower’s other assets to pay off the extra (additional) loss. The lender can use the other assets of the borrower even if the assets were not recorded as loan’s collateral. When a person (borrower) need funds there are various options available for them.

Of these options, one is secured loan facility. Secured loan refers to the debt needs collateral from the borrower as the security. The collateral can be any asset, and the lender has the right to seize this asset that is put by the borrower as the security when the borrower fails to pay the loan. The lender sells the asset in order to satisfy the debt to settle down the borrower defaults.

The recourse loans are a kind of secured loans that is usually found in automobile and real estate loans. However, a recourse loan is a loan where the lender is allowed to seize the collateral and debtor’s other assets, and the lender can take legal action against the borrower. The lender also has the right to seize money from savings, financial accounts, checking and from other income sources of the borrower such as bonuses, commissions and pension’s income and retirement program.

The recourse loan’s contract and terms usually outline the kinds of assets that a lender goes after when a debtor is not able to pay back their financial obligations. In a full recourse loan, a lender is allowed to go after other assets of borrower if any balance is outstanding even after selling the collateral asset. In the case of limited recourse loans, the lender is only allowed to pursue assets that are particularly mention in the contract.

Frequently Asked Questions (FAQs)

What is the difference between Recourse Loan and Non-Recourse Loan?

Non-recourse refers to the type of loan that allows the lender to use only the assets which are recorded as collateral. For instance, mortgages are considered as non-recourse loans as in mortgages home itself used as a collateral that means the lender allows seizing and selling the home only if the borrower is not able to pay back the loan. The lender does not have the rights to go after other assets of the borrower such as personal bank accounts and any other asset to recover the outstanding balance of a loan.

On the contrary side, recourse loans are the loans where a lender can use the other assets of the borrower even if the assets were not recorded as loan’s collateral such as hard money loans, even if the loans are used to buy real estate.