Evaluating the Risks of Non-Recourse Loans

A non recourse loan has more risks to a lender than to a borrower. This is because a non recourse loan, unlike a recourse loan, limits the lenders ability to go after any additional assets of the borrower in the event of a loan default. A non recourse loan limits a lender to the pledged collateral only as security for the loan.

Non Recourse Loans versus Recourse Loan

Non recourse loans are seen as more advantageous to borrowers and as a result are required in many states over recourse loans. A recourse loan allows the lender to not only obtain the asset used in the collateral pledge, but also attach other assets as collateral for the loan. This can be riskier for the lender if the borrower has insufficient assets necessary to cover the remaining loan balance.

Non Recourse Loan Risk

A non recourse loan’s risk is to the lender in terms of a potential loan default. If a non recourse loan defaults, the borrower’s liability is limited to the collateral. This limitation protects the interests of the borrower from the standpoint that once the collateral is seized, the borrower has no further obligation for the loan. This is why lenders will charge a higher interest rate and require a higher collateral amount in order to protect its interests in the event of a loan default.

Aside from the potential for loan default, there are not many other risks associated with a non recourse loan. The loan provides good protection for a borrower against a lender coming after other personal assets or collateral. The lender’s higher interest charges associated with non recourse loans may make them more prone to default as borrowers may find themselves subject to going upside down on the loan as the amount of the loan is more than the value of the asset purchased with the loan.

Recourse Loan Risk

Recourse loans entail a higher level of risk to a lender and a borrower because non-collateralized assets can be attached or seized by the lender in the event of loan default. This potential risk to both parties means that a non recourse loan has a limited risk whereby a recourse loan represents a potential limitless risk to the parties involved.

A borrower who takes out a loan because of their credit or financial situation should consider limiting their liability as it relates to any potential for loan default. This includes considering a co-signer, additional collateral and finding ways to improve a credit situation in order to lessen the need for a non recourse or recourse loan and subject their assets to seizure in the event of default.