Recourse Loan
Definition
A recourse loan is a type of loan that allows the lender to not only claim the secured assets (collateral) in the event of a default but also to pursue the borrower’s other assets and income if the collateral does not cover the full outstanding loan balance. This type of loan minimizes the lender’s risk by providing multiple pathways to recover the funds.
Key Characteristics:
- Borrower Liability: The borrower is fully liable for repaying the loan. If a default occurs, the lender can act on additional assets.
- Endorser/Guarantor: An endorser or guarantor might also be liable for the loan repayment if the primary borrower defaults.
- Security: Recourse loans are typically secured by specific assets; however, the lender’s security interest extends beyond those assets.
Examples
- Home Mortgages: Many home loans are recourse loans, giving lenders the right to pursue deficiency judgments if foreclosure sale proceeds are insufficient to cover the outstanding loan balance.
- Car Loans: If a borrower defaults on a car loan, the lender can repossess the car and still pursue the borrower for any remaining balance owed.
- Business Loans: Small business loans often require personal guarantees from business owners, making them recourse loans.
Frequently Asked Questions
What is the difference between a recourse loan and a nonrecourse loan?
A recourse loan allows the lender to recover the remaining debt by seizing the borrower’s other assets if the collateral does not cover the full amount. In contrast, a nonrecourse loan limits the lender’s recovery strictly to the collateral pledged.
Who bears more risk in a recourse loan?
The borrower bears more risk in a recourse loan because they are liable for any remaining debt after the collateral is seized and liquidated.
Are recourse loans common in personal finance?
Yes, many personal loans, such as mortgages and car loans, are structured as recourse loans.
Can recourse loans affect credit scores?
Yes, defaulting on a recourse loan can negatively impact the borrower’s credit score, just as with any other type of loan.
Do all business loans feature recourse arrangements?
Not all, but many business loans, especially for small businesses, feature recourse arrangements to provide additional security to the lender.
Related Terms
Nonrecourse Debt
Nonrecourse debt is a type of loan where the lender’s only claim against the borrower is the specific collateral pledged for the loan. If the borrower defaults, the lender can seize the collateral but cannot pursue the borrower’s other assets or income.
Limited Partnership
A limited partnership consists of at least one general partner with unlimited liability and one or more limited partners whose liability is confined to the extent of their investment.
Deficiency Judgment
A deficiency judgment is a court order issued against a borrower when the proceeds from the sale of the collateral are insufficient to repay the loan.
References
- Investopedia: Recourse Loan
- Wikipedia: Recourse Loan
- Internal Revenue Service (IRS) Recourse vs. Nonrecourse Debt
Suggested Books for Further Study
- “Bank Management & Financial Services” by Peter Rose and Sylvia Hudgins - This book provides in-depth insights into banking services, including loan structures.
- “Credit Risk Management: How to Avoid Lenders Recourse” by Jiří Witzany - A detailed guide exploring credit risk and strategies for managing it.
- “Investments” by Zvi Bodie, Alex Kane, and Alan J. Marcus - An extensive resource covering investment principles, including different types of debt instruments.
Fundamentals of Recourse Loan: Finance Basics Quiz
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