Recourse and non-recourse (NR) refer to two different types of loans and the level of responsibility borrowers have for repaying the debt. In a recourse loan, the lender can recover any unpaid balance of the loan from the borrower, even if it exceeds the value of the collateral used to secure the loan. The borrower is liable for the full amount of the loan, regardless of whether the collateral covers it or not.
In contrast, a NR loan limits the lender’s ability to recover the unpaid balance of the loan. The lender can only recover the value of the collateral used to secure the loan, and the borrower is not personally liable for any shortfall. If the collateral value does not cover the outstanding balance of the loan, the lender may have to accept the loss.
Recourse loans are more common than non-recourse loans, especially in commercial real estate transactions, where the collateral can be very valuable. However, non-recourse loans are sometimes available for specific types of transactions, such as refinancing existing debt or purchasing distressed assets.
Borrowers who take out recourse loans face greater financial risk, as they are personally responsible for repaying the loan. In contrast, NR loans may offer more protection to borrowers who are unable to repay the loan, as they are not personally liable for the shortfall. However, NR loans may also come with higher interest rates or more stringent collateral requirements, as the lender bears more risk.
If you have any questions about recourse loans or any other aspect of investing, don’t hesitate to reach out to our team at Funding Bay. We’re here to help you achieve your financial goals.
