Loans come in literally all shapes, sizes, and categories. Learn more about the difference between recourse vs nonrecourse loans and how they might apply to your loans.
When a borrower is getting ready to take out a loan, it makes sense for them to want to research different types of loans. There are payday loans, installment loans, home loans, car loans, and more. They may want to research things like personal loans vs installment loans and recourse vs nonrecourse loans. Learn more about whether your loan is a recourse vs nonrecourse loan so you can understand your loan agreement better.
No matter the type of money loan you are looking for, it's always a good idea to include loan payments in your monthly financial plans ahead of time. This way you'll be able to more easily repay the loan and avoid defaulting in the first place. This will increase your credit score and make more types of loans available to you as a borrower.
What Does "Recourse" Mean?
Before you can adequately understand the difference between a recourse vs nonrecourse loan, you need to understand the meaning behind the word "recourse" itself.
The word "recourse" comes from the Latin word "recursus," which meant to return, retreat, or run back to. In the modern day, this word is now used as a noun and refers to a kind of help someone has the ability to "run back to."
For example, when someone "has recourse," it means they have something they can lean on for help or aid. The legal and financial worlds now use this word today when talking about something someone can use for help or aid.
In the instance of recourse loans and nonrecourse loans, the term recourse has to do with what legal action a lender is and is not allowed to take in case a borrower defaults on a loan.
What is a Recourse Loan?
A recourse loan is a type of loan that grants a lender legal recourse in case the borrower defaults on the loan. Having recourse allows the lender to seize assets on top of any existing collateral to repay the loan.
For example, if a borrower takes out a recourse loan, and uses their car as loan collateral, and the borrower defaults on that loan, then the lender can not only seize their car as loan collateral to repay the loan amount owed, but the lender can also sue to seize other assets to finish paying off the loan amount owed.
However, if the car collateral is sufficient to pay off the balance owed, then the lender won't be able to sue to seize more of the borrower's personal assets. This type of legal action is only to pay off whatever the borrower still owes.
What is a Nonrecourse Loan?
A nonrecourse loan is a type of loan that does not grant a lender legal recourse in case the borrower defaults on the loan. Not having recourse means the lender is not allowed to seize assets on top of any existing collateral to repay the loan.
For example, if a borrower takes out a nonrecourse loan, and uses their car as loan collateral, and the borrower defaults on that loan, then the lender can only seize the car collateral to help repay the amount borrowed. If the existing loan collateral is not sufficient to repay the rest of the loan amount owed, then the lender cannot seize any other personal assets of the borrower.
Recourse vs Nonrecourse Loans
Nonrecourse loans are less common than recourse loans because they pose a greater risk to the lender. Lenders want to be able to ensure they are repaid, even when legal action might be necessary. That is why they put safety measures in place to mitigate borrowing risks, like loan collateral and the ability to have full recourse in case the borrower defaults.
Because these different loan types have different levels of liability, there are many differences for the lender and borrower between the two.
Where is the Personal Liability?
The biggest difference is that a recourse loan allows lenders to have legal recourse and hold the borrower personally liable for repaying the loan they take out in full. Meanwhile a nonrecourse loan does not give lenders legal recourse and holds the lender personally liable for repaying the loan instead of the borrower.
Recourse Loan Pros and Cons
Recourse loans work in favor of the lender, so they are going to be the most common type of loan. Because they allow the lender to have more safeguards when lending, they can also have lower interest rates and allow for people with lower credit scores to apply.
One common type of recourse loan is a title loan.
- secured debt
- can have collateral
- lender has recourse
- they can seize other assets
- can have lower interest rates
- can have lower credit score requirements
Nonrecourse Loan Pros and Cons
Nonrecourse loans do not work in favor of the lender, so they are going to be a lot less common. Because they don't allow the lender to have as many safeguards when lending, they can tend to have very high interest rates and require much higher credit scores.
Some common types of nonrecourse loans are mortgage loans and car loans.
- unsecured debt
- can have collateral
- lender does not have recourse
- they cannot seize other assets
- can have higher interest rates
- can have higher credit score requirements