What is a Recourse Loan?

A recourse loan allows a lender to sue for personal assets if the collateral used to secure the loan does not cover the loan amount that was borrowed. This protects the interests of the lender against loan default and makes recourse loans less risky than non-recourse loan options. For example, if a borrower owes $100,000 and used his home as collateral to secure the loan, but now the value of his home has gone down to $50,000, they would be personally responsible for the difference of $50,000.

Recourse versus Non-recourse Loans

A borrower who takes out a recourse loan will pay a lower interest rate. Non-recourse loans have higher rates because of their level of risk. The lender is limited to the pledged collateral of the borrower, with no further recourse and cannot collect on any deficiency amounts. 

Borrower’s Rights and Obligations

Some states do not permit recourse loans to protect the interests of the consumer. A borrower who takes out a recourse loan should understand their rights and obligations with the loan. Also, be sure to review whether the loan is enforceable in their state.