Table of Contents
- What Is a Recourse Loan?
- Key Takeaways
- Understanding Recourse Loans
- Types of Recourse Loans
- Recourse Loan vs. Non-Recourse Loan
- Advantages and Disadvantages of Recourse Loans
- Example of a Recourse Loan
- Do All States Allow Recourse Loans?
- What Assets Can Recourse Loans Seize?
- What Is an Example of a Recourse Loan?
- The Bottom Line
What Is a Recourse Loan?
Let me explain what a recourse loan really is. It's a type of secured loan that gives the lender a way to recover their money if you, the borrower, can't pay up and the collateral doesn't cover the full amount. In essence, with a recourse loan, the lender isn't limited to just the asset you put up as security—they can go after your other assets or even take legal action to get the rest of the debt paid off.
Key Takeaways
Here's what you need to know right away: A recourse loan lets the lender take the collateral and any other assets you own if you default. That could include your bank accounts or sources of income. The loan agreement spells out exactly which assets are fair game. Most hard money loans fall into this category. Lenders love them for the extra security, but as a borrower, you'd probably prefer a non-recourse loan where they can only touch the collateral.
Understanding Recourse Loans
When you're looking for financing, secured loans are one option, requiring you to put up collateral that the lender can seize and sell if you default. A recourse loan takes this further—it's common in real estate and auto financing, giving lenders more power with fewer restrictions on what they can claim. They can take the collateral, your other assets, and even sue you to cover the debt.
You should note that recourse loans might be easier to get, but they put more of your assets at risk if things go wrong. Lenders can dip into your savings or checking accounts, or garnish your wages through a court order, which means your employer withholds part of your pay—including bonuses, commissions, or even retirement income—to pay the debt.
The loan contract will detail what assets the lender can pursue. In a full recourse loan, it's everything you own; in a limited one, only specific assets named in the agreement.
Types of Recourse Loans
Certain loans are typically recourse, like hard money loans for buying real estate. These allow the lender to take the property if you default and sell it themselves—sometimes they even lend hoping for that outcome to flip it for profit.
Recourse Loan vs. Non-Recourse Loan
Non-recourse loans are secured too, but if you default, the lender can only take the collateral—nothing else. Any leftover debt after selling it gets written off. Traditional mortgages are often non-recourse, so the lender just takes the house, not your other stuff.
Advantages and Disadvantages of Recourse Loans
From your perspective as a borrower, recourse loans can be a lifeline if you have bad credit, since lenders are more willing to approve them. But watch out—the lender can come after your other assets if you default, though contracts might limit this, so read carefully.
For lenders, these loans lower risk with less-creditworthy borrowers by allowing broader asset seizure, easing their worries about repayment. That said, recourse loans like hard money ones cost you more than bank loans. Lenders push for recourse, while you'd want non-recourse for less exposure.
Example of a Recourse Loan
Imagine you take a $500,000 recourse loan to buy a home, then the market tanks, and you foreclose when the home's worth $400,000. The lender can seize the house and go after your other assets to cover the $100,000 shortfall.
Do All States Allow Recourse Loans?
Most states do allow both recourse and non-recourse home loans, but 12 don't permit recourse: Alaska, Arizona, California, Connecticut, Idaho, Minnesota, North Carolina, North Dakota, Oregon, Texas, Utah, and Washington.
What Assets Can Recourse Loans Seize?
It depends on state laws and the contract, but usually, lenders can take income, bank deposits, the collateral itself, or valuable items like vehicles.
What Is an Example of a Recourse Loan?
Auto loans are a prime example—if you stop paying, the lender seizes the car and sells it at market value, and if that's not enough, they can pursue more.
The Bottom Line
If you can get a non-recourse loan, you'll have less risk since only the collateral is on the line. But if your credit is shaky, a recourse loan might be your ticket, often with lower rates because it's safer for the lender.
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