Many traditional mortgages are no-recourse loans. You can only use the house itself as security. This means that if the borrower defaults on their mortgage, the bank can close, own and sell the house to satisfy the loan. But the lender cannot look for the remaining balance on the mortgage and must therefore take it as a loss. For the lender, full-recourse debt is virtually risk-free. Recourse provides lenders with the legal means to seize a borrower`s assets if the borrower is in default of a debt. If the debt is a complete remedy, the borrower is responsible for the total amount of the debt, even if it exceeds the value of the secured asset. Here is a hypothetical example of a recourse loan. Suppose a homeowner takes out a $500,000 recourse loan to buy a home, and then they are seized after the decline in the local real estate market. If the value of the home has now fallen to $400,000 and it was purchased with a recourse loan, the lending institution can look for the borrower`s other assets to offset the $100,000 outstanding and repay the loan to close it. In other words, the seller is not obliged to reimburse the investor for the losses incurred.
The same applies without recourse to asset-based credit agreements where the lender is prohibited from recalculating unpaid invoices caused by the debtor`s insolvency. A recourse loan – also known as recourse debt – is a type of loan in which the borrower is 100% responsible for any outstanding balance. Loans require collateralCollateralThe contract is an asset or property that a natural or legal person offers to a lender as collateral for a loan. It is used as a way to get a loan that serves as protection against potential losses for the lender if the borrower defaults on their payments. (since these are guaranteed loans). With an asset on the table that serves as collateral, the lender can then re-own and sell the asset to make up for losses. If the market value of the asset is less than the loan amount, the lender may look for other assets of the borrower to compensate for the additional loss. This applies even if the other assets were not used as collateral for the loan.
A lender is best able to impose a debt recourse contract on a borrower if the borrower is unable to obtain financing elsewhere on better terms, and especially if the borrower is in a difficult financial situation. Conversely, a borrower may be able to demand non-recourse debt terms if they can choose from many lenders and have such excellent financial results and asset reserves that they can justify their claims. Because lenders can mitigate risk with recourse loans, they can charge lower interest rates. The main difference between the two is that a recourse loan favors the lender, while a non-recourse loan benefits the borrower. Thus, the distinction between recourse and non-recourse loans comes into play if money is still owed on the debt after the sale of the guarantee. Recourse loans allow lenders to look for other assets of the borrower if there is still a balance left after the collateral is collected. .