Recourse Loan - Explained
What is a Recourse Loan?
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Table of ContentsWhat is a Recourse Loan?How Does a Recourse Loan Work?
What is a Recourse Loan?
A Recourse Loan or recourse debt is a loan agreement that allows the lender to seize and sell the borrowers assets (beyond the collateral identified in the agreement) if the borrower fails to pay the liability and the value of the underlying assets are not enough to cover the balance.
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How Does a Recourse Loan Work?
In a recourse loan, the borrower is personally liable to repay the debt amount, and, if he or she fails, the lender has the right to garnish wages or levy account for collecting the owed amount. A recourse loan term provides more power to the lender and allows the lender to go after the other assets of the borrower which were not used as the collateral on the occasion of default. For example, if someone takes a recourse loan of $400,000 for buying a property. Then after a year, the owner goes into foreclosure and the lender finds out the present value of the property is $250,000. In this case, the lender can seize the other assets of the borrower in order to cover the outstanding balance. The lender is allowed to draw funds from the borrowers financial accounts both savings and checking. They can also garnish the borrowers wages to collect what is owed by the borrower. A non-recourse loan term doesnt allow the lender to go after any assets other than the collateral. There are two types of recourse loan terms, full recourse, and limited recourse.
- Full Recourse Loan - In full recourse agreement, the lender can pursue any and all assets of the borrower until the whole amount of the debt is covered.
- Limited recourse loan agreement mentions which assets can be pursued by lenders on the occasion of default. The lender cannot go after all assets if the debtor fails to repay the loan, they can only pursue those assets which are listed on the agreement.
Agreements for hard money loans for real estate often contain recourse loan terms. Consumers with limited or poor credit history are often forced go for hard money loans as other institutions do not approve their loan application. The interest rate of hard money loan is often higher than the rates offered by banks. The lender gives money to these debtors on the conditions of a recourse loan. Consumers with poor credit history usually take out such loans for buying properties. The lender agrees to approve a loan to such a debtor with a guarantee of having access to the borrowers other assets in case of default.