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 asset 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 .
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.