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The difference between a recourse and non-recourse loan involves how aggressively a lender can pursue a borrower who defaults on the loan.

In both, lenders can seize any asset that the borrower uses as collateral. Usually, the collateral is the asset that was purchased by the loan. For example, in either a recourse or non-recourse mortgage, the lender can seize the house if the borrower defaults.

If money is still owed after the collateral is seized and sold, the lender in a recourse mortgage can go after the borrower’s wages or his other assets. But in a non-recourse mortgage, the lender cannot. If the collateral does not cover what the borrower owes, the lender in a non-recourse loan must absorb the difference and walk away.

Borrowers almost always favor non-recourse loans; lenders prefer recourse loans. Non-recourse loans come with higher interest rates, and they’re reserved for borrowers with the best credit. Failing to pay off a non-recourse loan may preserve other assets, but the borrower’s credit score will suffer.

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