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A non recourse loan is one where the borrower’s liability in the case of a loan default is limited to the collateral pledged for the loan. Because of this limitation, lenders will charge a higher interest rate and require a higher amount of collateral to secure the loan.

Determining a Non Recourse Loan

Whether a loan is a non recourse loan or not is usually determined at the time the loan is agreed upon. A non recourse loan’s characteristics include a high rate of interest to protect the interests of the lender against a potential default risk. This higher interest rate comes with a collateral requirement, which increases the value of the loan but reduces any equity the borrower may have in the property the loan proceeds are used to purchase, such as a home.

Understanding Impact of a Non Recourse Loan

Determining whether a borrower has a non recourse loan or not is important because in the event of loan default the collateral pledged for the loan will be subject to surrender in order to satisfy the outstanding loan debt.