What’s The Difference Between A Recourse and Non recourse Loan


Understanding the Idea of a Recourse Loan

The factor that helps to define this type of loan is that the lender who offers this type of arrangement is in a position to seek control of any of the borrower’s assets if he or she should default on the loan. Thanks to this provision, the lender does not have to worry about possibly losing anything, even if the borrower stops making payments for any reason.

With the recourse loan, the first thing the lender will do after the default is attempt to work out some type of arrangement with the debtor. If those attempt fail, the next step is to call the loan due and then seize control of any asset that was declared as collateral for the debt. When the lender is able to sell that asset for enough to completely cover the outstanding debt plus the expenses associated with the collection process, the matter is considered settled in full.

If selling the secured asset does not cover the total expense, then the lender has the legal right to petition the court for access to more of the debtor’s assets. For example, if the original loan was obtained as part of a real estate investing strategy and the property must be sold at below the remaining balance due on the loan, the lender can then seek to secure access to another piece of property that the debtor owns free and clear.

Like many other states, the laws in Utah help to define the nature of assets that a lender can claim in order to settle a debt. An attorney can advise the lender of which assets are most likely to be acceptable to the court, given the amount remaining on the debtor’s account.

How Does a Loan with No Recourse Work?

This type of loan can also include the pledging of collateral at the time the loan is secured. The difference is that the lender is limited to only being able to seize the declared asset if the debtor should default on the loan. If the lender is unable to sell that seized asset for enough to cover the outstanding debt, then it is necessary to write the remainder off as a loss.

For the borrower, this means that once the asset used as collateral is in the hands of the lender, that is the end of the financial arrangement. The borrower has no more financial obligation to that lender.

What to Expect with Each Type of Loan

Loans that do not include some type of recourse option for the lender to exercise typically come with higher interest rates and will require the borrower to have a higher credit rating. This is because loans of this kind present a greater risk to the lender. Since the market value of any asset can depreciate over time, the inability to seize control of additional assets increases the chances of losing money if the borrower does default.

Even with something like a mortgage, it is not always a sure thing that the value of the real estate pledged will increase in market value over the years. For this reason, many lenders typically include a recourse provision in their mortgages as a way of protecting their interests.

The Impact on the Borrower

The inclusion of a recourse provision is also helpful for the borrower. Along with being able to obtain lower interest rates, the fact that the lender can seize other assets in order to fully settle the debt will cause less damage to the credit rating in the event of a default. This is because lenders are more likely to submit comments to the three major credit reporting agencies that the debt was eventually settled in full. When there is no recourse provision, those comments will likely reflect the fact that the debt was not settled in full.

To weigh the pros and cons of each approach, it helps to consult with professionals like those at Madison Group Funding. With their help, you can explore the various loan options open to you, and the kind of commitment that comes with each. This will help you determine how to go about securing the loan that serves you well in the years to come.

Loans come with all sorts of provisions. Perhaps you have lately become aware of the concept of non recourse loans versus recourse loans. The difference between the two is very easy to grasp.