How do Recourse and Non-Recourse Loans Work?

There are a wide range of loans and financing options available for individuals and businesses. Each type of loan has advantages and drawbacks. Business leaders must examine the different types of loans to determine the best course of seeking financing for the business. Recourse and non-recourse lending are two types of financing businesses can choose from. Knowing the differences between the two can help businesses select the best option for their goals.

Recourse Loan

In a recourse loan, the lender has the power to take assets used as collateral in securing the loan if the borrower defaults on repayment. In many cases, the collateral is the item purchased by the loan, such as a house in a mortgage. If the borrower defaults on the loan, the terms of recourse lending allows the lender to go after the borrower’s other assets and even take legal action to have the borrower’s wages garnished. This is done in order to get back any money that was lost due to the loan default. Lenders tend to favor this type of loan because it provides greater assurances that they will be fully repaid for the money borrowed.

Non-Recourse Loan

A non-recourse loan is similar to a recourse loan in that the lender has the power to take assets used as collateral in securing the loan if the borrower defaults on repayment. However, in non-recourse lending, the lender cannot go after the borrower’s other assets or have wages garnished in order to get back the full amount borrowed. Instead, the agreed-upon collateral is the only compensation from the borrower in the event of default. It’s for this reason that non-recourse lending is typically favored by borrowers. Non-recourse lending typically comes with higher interest rates and has stricter requirements for qualifications to compensate for the more favorable terms for the borrower.

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