The Risks of a Recourse Loan

A recourse loan presents a significant level of risk to a borrower. If the borrower is unable to pay back the debt obligation, the lender can attach a judgment and seize assets. In addition to the collateral that was used to secure the loan, a lender has the ability to go after any additional holdings of the borrower in order to satisfy the outstanding debt. In addition, lenders can take out a judgment and garnish wages. This risk is not present in a non recourse loan because the risk is limited to the borrower’s collateral.

Reason for Recourse Loans

Recourse loans may be good for certain borrowers who do not wish to pledge a large collateral amount such as a home, car or other large asset and seek a low interest rate. Recourse loans provide better rates.

State’s Determination on Recourse Loans

States determine whether or not a recourse loan is in the best interest of a borrower or lender.  Some states permit the use of recourse loans by lenders while others in the name of protecting borrowers do not.