Ever heard of a recourse loan and a non-recourse loan? When it comes to borrowing money, there is a lot of financial jargon that can be confusing—including recourse and non-recourse loans.
However, understanding the distinctions between these two loans is critical if you’re about to take out a mortgage, auto loan, personal loan, or any other type of loan.
What is a Recourse Loan?
A recourse loan is a type of debt in which a lender can hold the borrower personally liable for repaying the debt. With recourse loans, the lender can pursue repayment of the loan beyond the original pledged collateral (which in real estate, is the property that was purchased).
If the borrower fails to repay the loan according to the obligation, the lender can take legal action in order to fully collect what is owed such as garnishing wages, levying accounts, or possibly pursuing other collateral owned by the borrower.
What is a Non-Recourse Loan?
If you get a non-recourse auto loan, for example, your car would likely be used as collateral on your loan. That means that, if you fail to repay your loan, your lender can take possession of your car and sell it in order to pay off the loan.
If the value of your car has depreciated more than the amount you owe at the time they repossess your car, then the lender is out of luck.
In a non-recourse loan, the lender cannot go after any of your other assets to make up the difference. For example, if you get a non-recourse personal loan without collateral and you used it to buy that car, your lender can’t seize your car or any other assets.
So what’s the difference?
As explained above, the biggest difference between a recourse loan and a non-recourse loan is that with a recourse loan you are personally liable to repay the lender in full when you default on your loan.
Who gets offered a non-recourse loan? Who doesn’t?
People with better credit will be more likely to qualify for a non-recourse loan than those who have fair or poor credit. Also your net worth, liquidity, and track record come into play when a lender is making a decision regarding what you qualify for.
If you have less-than-ideal credit, you may only be approved for a recourse loan or you might have to pay a very high-interest rate in order to get a non-recourse loan. That’s because the lender takes on more risk with non-recourse loans than with recourse loans.
We’re here to help
If you are preparing to finance a new property, compare the different loan options available to you and consider the advantages and disadvantages between a recourse loan or a non-recourse loan. You and only you can determine what type of loan is best for you.
To ensure you’re making the best real estate investment decisions for your goals, reach out to us at Asset Point Capital today.