Recourse Loan
What is a recourse loan?
In business, recourse is the contractual right to demand payment for a debt from the individual or entity who owes it. Thus, a recourse loan is an obligation that allows the lender to to come after the borrower’s assets if repayment is not made. A nonrecourse loan limits the right of the lender to demand payment to only the actual asset that is being financed, freeing the borrower from personal liability. Home mortgages are the most common example of a nonrecourse loan.
What are the types of recourse loans?
- Full recourse loan: a lender may take any assets of the borrower if repayment is not made.
- Limited recourse loan: a lender may only take assets specifically named in the loan agreement if repayment is not made.
What is the difference between a limited recourse loan and a nonrecourse loan?
A limited recourse loan and a nonrecourse loan differ because the assets specified in a limited recourse loan are not the assets actually being financed by the loan. For instance, a personal loan that specifies jewelry as collateral but shields the borrower’s other assets is a limited recourse loan. A loan for the purchase of jewelry that specifies the jewelry itself as collateral and shields the borrower’s other assets is a nonrecourse loan.