When you’re applying for a loan, you might feel confused by the terms non-resource and recourse loans at first. A simple explanation for the difference between them has to do with whether a lender can procure and sell assets of the borrower if he or she fails to abide by the terms of the loan.
It’s important not to confuse these terms with collateral. The latter term describes a personal asset of the borrower such as a home or vehicle that he or she pledges with the loan. That means the lender can take ownership of the asset and sell it to cover the bank’s losses. The terms for both non-recourse and recourse loans allow the lender to take ownership of any collateral item the borrower offered when applying for the loan.
Recourse Loans Favor Lenders
Sometimes the borrower still owes money on a loan even after the lender has seized and sold his or her collateral. When this happens with recourse loans, the lender can sue the borrower to take ownership of other assets to attempt to recoup the bank’s losses. Lenders can even garnish the wages of borrowers who default. Since this type of loan lowers the lender’s risk, the financial institution may have greater leeway in approving loan requests for people with little credit or poor credit in the past.
Non-Recourse Loans Favor Borrowers
With a non-recourse loan, the lender has no other avenues of the collection after selling the borrower’s collateral. The financial institution that approved the loan must take a loss for it at this point. It’s common for mortgage lenders to offer these loans as non-recourse, meaning the lender can only seize and resell the home to collect on the debt. Because of the increased risk to the lender, non-recourse loans typically come with a higher interest rate and borrowers must pay them in a shorter time.
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