A:

The essential difference between a recourse and non-recourse loan has to do with which assets a lender can go after if a borrower fails to repay a loan. As a matter of principle, borrowers almost always favor non-recourse loans, while lenders almost always favor recourse loans.

In both types of loans, the lender is allowed to seize any assets that were used as collateral to secure the loan. In most cases, the collateral is the asset that was purchased by the loan. For example, in both recourse and non-recourse mortgages, the lender would be able to seize and sell the house to pay off the loan if the borrower defaults.

The difference comes if money is still owed after the collateral is seized and sold. In a recourse mortgage, the lender can go after the borrower's other assets or sue to have his or her wages garnished. In a non-recourse mortgage, however, the lender is out of luck. If the asset does not sell for at least what the borrower owes, the lender must absorb the difference and walk away.

While potential borrowers might find it attractive to hold out for non-recourse loans, it is important to remember that they come with higher interest rates and are reserved for individuals and businesses with the best credit. Additionally, failure to pay off a non-recourse debt may leave other assets unharmed, but the borrower's credit score will be affected in the same way as a failure to repay recourse debt.

This question was answered by Ken Clark.

RELATED FAQS

  1. What is the difference between "closed end credit" and a "line of credit?"

    Find out about the difference between closed-end credit and lines of credit, and how both closed- and open-end credit is ...
  2. In what instances does a business use closed end credit?

    Find out how businesses use closed-end credit to finance large purchases such as vehicles, equipment and property, including ...
  3. What are the long-term effects of delinquent accounts?

    Find out more about loan delinquency, loan defaults and the long-term consequences of borrowers who are delinquent on their ...
  4. How was the American Dream impacted by the housing market collapse in 2008?

    Learn how the American Dream was impacted by the housing collapse in 2008. Due to the housing collapse, millions ended up ...
RELATED TERMS
  1. Chattel Mortgage Non-Filing Insurance

    An insurance policy covering losses that result from a policyholder ...
  2. Total Annual Loan Cost (TALC)

    The projected total cost that a reverse mortgage holder should ...
  3. Forbearance

    A temporary postponement of mortgage payments.
  4. Mortgage Modification

    A permanent change in a homeowner's home loan terms that makes ...
  5. USDA Non-Streamlined Refinancing

    A mortgage-refinancing option offered by the United States Department ...
  6. No-Appraisal Mortgage

    A type of home loan used for refinancing for which the lender ...

You May Also Like

Related Articles
  1. Investing

    Where Are Real Estate Stocks Heading?

  2. Stock Analysis

    Can American Capital Agency Maintain ...

  3. Stock Analysis

    How Two Harbors' Derivatives Work?

  4. Stock Analysis

    How Chimera Investment Bear The Brunt ...

  5. Stock Analysis

    How Are Interest Rates Affecting Annaly ...

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!