Comparing Non-Recourse Loans and Recourse Loans

Nonrecourse loans differ from recourse loans in that a non recourse loan has no additional obligation once the collateral has been surrendered in the case of loan default.  A recourse loan protects the interests of the lender while a non recourse loan provides better protection for a borrower. As a result, a non recourse loan will carry a higher interest rate and more stringent requirements regarding loan-to-value (LTV) ratios than a recourse loan. This helps a lender secure some of its liability in the event of default.

Collateral Requirement for Non Recourse Loans

A non recourse loan has a lower LTV than recourse loans. This means that a lender will require collateral that is higher in value in order to reduce the potential shortfall that may occur if the borrower defaults on the loan.

Additional Liability for Recourse Loans

Recourse loans give the lender the ability to attach other assets owned by the borrower in addition to the collateral required by the lender. The recourse loan gives more rights to the lender to settle a loan beyond the collateral requirements. The upside for the borrower is that a recourse loan has a lower interest cost and does not require a collateral amount that is close or equal to the loan amount.