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Recourse vs Nonrecourse Loans: What You Should Know

Recourse vs Nonrecourse Loans: What You Should Know
Ashley Kilroy
Ashley KilroyUpdated August 11, 2022
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Recourse loans and nonrecourse loans are secured loans, which means they require collateral from the borrower. However, with a recourse loan, the lender can take not just the collateral in the event of a default, but also the borrower’s other assets if the balance of the debt owed is greater than the value of the collateral. With a nonrecourse loan, the lender can only take the collateral, even if it’s not worth enough to cover the balance due.In most states, if you are considering taking out an auto loan, a secured personal loan, or a credit card, these are all typically recourse loans. You may receive a lower interest rate for them but you also assume greater risk because your lender can seize your loan collateral plus other assets if you default on the loan. Before taking on any new form of debt, it’s a good idea to understand recourse vs nonrecourse loans and how they work. Here’s what you need to know.

Recourse Loans

Recourse loans are secured loans, meaning the borrower provides collateral to get the loan. The difference between secured and unsecured loans is that a secured loan requires collateral from the borrower. An unsecured loan doesn’t.If the borrower defaults on a recourse loan, the lender can take the collateral. And if the collateral’s value is lower than the amount owed, the lender also has the right to seize additional assets of the borrower, such as property, bank accounts, and investment accounts.

Examples of Recourse Loans

Types of recourse loans include auto loans, credit cards, and hard money loans, which are loans with short repayment periods that are offered by non-bank lenders, typically for real estate. Often, the collateral used for recourse loans loses its value over time because of depreciation. If a borrower fails to repay a recourse loan, the lender repossesses the collateral and then can pursue other assets to recover the balance due. The lender can even garnish the borrower’s wages to recoup losses.For instance, let’s say a borrower takes out a $30,000 loan for a boat worth $40,000. The boat is the collateral for the loan. After a few years, the borrower defaults on the loan with an outstanding balance of $25,000. The lender repossesses the boat and sells it for $20,000. The lender can then seize the borrower’s other assets or garnish their wages to recover the remaining $5,000.It’s important to know that home mortgages are recourse loans in 38 states. (The other 12 states classify mortgages as nonrecourse loans.) And even though property values often increase over time, they do sometimes drop. In such a case, if the borrower defaults on a mortgage, the lender may not be able to get back all the money owed, even after selling the property. The lender can go after the borrower’s other assets to try to cover it.

Nonrecourse Loans

A nonrecourse loan also requires collateral from the borrower, but there is a key difference. If the borrower defaults on the loan, the lender can only seize the collateral. They cannot pursue the borrower’s other assets, even if there is outstanding balance on the loan.Nonrecourse loans are riskier for lenders because they have a greater chance of losing money on them. As a result, fewer lenders offer nonrecourse loans. 

Examples of Nonrecourse Loans

The most common example of a nonrecourse loan is a mortgage in one of the 12 states that allow only nonrecourse home loans. If you have a mortgage in Alaska, Arizona, California, Connecticut, Idaho, Minnesota, North Carolina, North Dakota, Oregon, Texas, Utah, or Washington, you have a nonrecourse loan for your home. Failing to repay your mortgage in one of these states might cost you your house, but your lender cannot take any of your other assets to satisfy the debt.

Are Personal Loans Recourse or Nonrecourse?

There are many reasons to consider a personal loan. As you’re exploring options, know this: Whether a personal loan is recourse or nonrecourse depends on the lender. Lenders often only offer personal recourse loans because they have less risk. However, by researching numerous lenders you might be able to find nonrecourse personal loans

Recourse Loan Vs. Non-Recourse Loan: Which Is Better?

As you’re trying to determine a recourse vs nonrecourse loan, you’ll want to weigh the pros and cons. For instance, your credit, ability to take on debt, and the lender you work with will influence how recourse vs nonrecourse loans fit your financial circumstances. Here’s how.

Credit History 

Recourse loans have less stringent credit requirements for borrowers. So if you have poor or mediocre credit, your lender will likely only offer you a recourse loan. On the other hand, an excellent credit score typically means less risk to the lender. As a result, they may be willing to give a nonrecourse loan to a borrower with stellar credit.

High Debt-to-Income Ratio

Lenders also look at your debt-to-income ratio to determine the risk they might take by lending to you. Borrowers whose existing debt payments eat up a large chunk of their monthly income will be less likely to receive either a nonrecourse or recourse loan with a low interest rate. Recommended: Avoiding Loan Sharks 

Lower Interest Rate 

Because recourse loans allow lenders to seize as many assets as necessary to satisfy the balance of a loan in the event of a default, they incur less risk. That means the interest rates lenders offer on recourse loans tend to be more favorable.

Approval Requirements

In general, nonrecourse loans are more difficult to qualify for because the lender incurs more risk with these loans. To qualify, you generally need stellar credit and a steady income.To receive a recourse loan, borrowers must sign a contract giving the lender permission to seize the collateral on the loan as well as additional assets in the instance of a default. 

The Takeaway

Unlike a personal loan without collateral, recourse and nonrecourse loans require an asset to secure the loan. With an auto loan, the car is the collateral, for instance.The difference between recourse vs nonrecourse loans is the lender’s ability to repossess the collateral plus any other asset that can help satisfy the outstanding debt if the borrower defaults on the loan. Recourse loans allow them to go after additional assets. Nonrecourse loans limit them to seizing the collateral only. Make sure you understand the terms of any loan you’re being offered.

3 Personal Loan Tips

  1. Shopping around helps ensure that you’re getting the best deal you can. Lantern by SoFi makes this easy. With one online application, you can find and compare personal loan offers from multiple lenders.
  2. Read lender reviews before taking out a personal loan. You’ll get a sense of how long it can take to receive the funds and how good the customer service is.
  3. Watch out for lenders who advertise “guaranteed” loans. Legitimate lenders will want to know your creditworthiness before offering a loan.  

Photo credit: iStock/Dmitry Kopylets
The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.LCPL0322008

Frequently Asked Questions

What is the difference between recourse vs nonrecourse loans?
How do I know if my loan is recourse or nonrecourse?
Are most personal loans recourse or nonrecourse?

About the Author

Ashley Kilroy

Ashley Kilroy

Ashley Kilroy is a personal finance expert with years of experience in radio, newspapers, magazines, and online content. Her work has appeared on websites including Forbes and Yahoo Finance. Ashley writes on a variety of personal finance topics for SoFi, including student loans, taxes, and insurance.
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