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Recourse vs Nonrecourse Loans: What You Should Know

Recourse vs Nonrecourse Loans: What You Should Know
Ashley Kilroy
Ashley KilroyUpdated March 7, 2025
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When it comes to borrowing, understanding the difference between recourse and nonrecourse loans is essential for making informed financial decisions. These two types of loans differ in terms of the lender’s ability to seek repayment beyond the collateral in case of a default. 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 personal loan, or a credit card, the loan will be a recourse loan. You may receive a lower interest rate for them, but you also assume greater risk because your lender can seize your loan collateral (if any) 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 can be secured or unsecured. Secured loans require collateral from the borrower, whereas unsecured loans do not.If the borrower defaults on a recourse loan, the lender can take the collateral, if any. If the collateral’s value is lower than the amount owed or the borrower didn’t put up collateral, the lender 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 then go after the borrower’s other assets to try to cover it.

Nonrecourse Loans

A nonrecourse loan typically 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 an 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?

Personal loans are typically recourse loans, meaning the lender has the right to pursue repayment beyond just reclaiming the collateral (if any). Since most personal loans are unsecured, lenders rely on the borrower’s creditworthiness and legal obligations to ensure repayment.In contrast, nonrecourse loans limit the lender’s ability to collect beyond the collateral tied to the loan. These are more common in secured loans like mortgages rather than personal loans. Because personal loans do not typically have collateral, lenders require strong credit and income verification to reduce their risk. If a borrower defaults, they remain personally liable for the unpaid balance, making personal loans primarily recourse loans.Recommended: Personal Loans: The Pros and Cons Explained

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.Recommended: Personal Loans for Bad 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.

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 may be more favorable.Recommended: Average Personal Loan Interest Rate

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, a steady income, and substantial collateral.To receive a recourse loan, borrowers must sign a contract giving the lender permission to seize the collateral on the loan (if any) as well as additional assets in the instance of a default.

The Takeaway

Recourse loans provide lenders with the ability to pursue additional assets in case of default. Nonrecourse loans offer more protection to the borrower by limiting recovery to the collateral. Recourse loans can be secured or unsecured, whereas nonrecourse loans are typically secured (meaning collateral is required).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.If you’re looking for a personal loan, Lantern by SoFi can help. With just one application, you can compare offers from multiple lenders in our network.

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?
Photo credit: iStock/Dmitry Kopylets
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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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