Loans with a right of recourse (Recourse Loans) are a type of secured debt that allows creditors to recover the balances of defaulted loans by confiscating the loan's collateral, where necessary, the borrower's other assets. Common types of recourse debt are car loans, credit cards, and, in most states, residential mortgages.

In the event of default, the lender can seize and sell the collateral. If this collateral is not enough to cover the outstanding balance of the loan, the lender can go after the borrower's other assets. Third-party recourse loans represent less risk for lenders, so they generally have lower interest rates and are more widely available.

Debt without a right of recourse is also secured by a guarantee from the borrower. However, in the event of default, the lender can only seize the collateral specified in the loan documents and cannot go after the borrower's other assets.

Few banks offer non-recourse loans, but home mortgages are treated as non-recourse loans in 12 US states.

Real estate financing with a right of recourse is allowed in Florida.

Debt without a right of recourse also has higher interest rates and more restrictive borrower qualifications, because debt without a right of recourse is riskier for creditors.

What is a recourse loan?

With right of recourse loans, the borrower is 100% personally liable for the loan amount. Therefore, the lender can first repossess or foreclose on the loan collateral, as specified in the loan agreement. If the lender is unable to recover the full loan balance by selling this collateral, it can obtain a judgment of infringement from the courts and go after the borrower's other assets. This is the case even for assets that have not been identified as underlying collateral for the loan and can include securing wages or charging bank accounts to pay off the remaining debt.

Credit cards, car loans and money loans - usually short-term real estate loans offered by non-bank lenders - are common types of loans with a right of recourse. In the event of default, the lender can repossess the vehicle or items purchased with the loan (collateral) and sell them to recover the outstanding loan balance. In many cases, the collateral will have already been depreciated or destroyed and the lender will have to obtain a court decision to be able to obtain deficiency judgment for the difference in value. The lender can then try to recover its money by seizing the borrower's other assets.

In all but 12 states, residential mortgages are also considered right-of-return loans - Florida is one of them. If a borrower is sunk on their mortgage - meaning the outstanding debt is greater than the value of the home - the bank may not be able to recover all their money from a foreclosure sale. In this case, the bank can obtain a judgment for the difference between the debt and the foreclosure sale price and then block the borrower's wages or claim other assets.

Even if a lender wins a judgment against a borrower, collecting the outstanding debt can be expensive and time-consuming. If a lender doesn't think the borrower has substantial assets to exploit, they may never actually collect the outstanding debt. However, you should always try to avoid this outcome by communicating with your lender if you think you might default.

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Example of a loan with right of recourse

If a borrower takes out a $ 20,000 loan to buy a $ 25,000 car, the debt is secured by the vehicle. If, after several payments, he leaves the loan with a balance of $ 16,000, the lender can repossess the car and sell it to recover the outstanding balance of the loan. However, if the car has depreciated in value and can only be sold for $ 12,000, the lender can also obtain a judgment from a court and then block the borrower's salary to collect the remaining $ 4,000.

What is a non-recourse loan?

A non-recourse loan is one in which, in the event of default, a lender can seize the loan collateral. However, in contrast to a right of recourse loan, the lender cannot go after the borrower's other assets - even if the market value of the collateral is lower than the outstanding debt. Even though lenders are limited in their ability to obtain a judgment, non-recourse loans still create some personal liability because the lender can seize the underlying loan collateral.

Even so, lenders who grant loans without a right of recourse run a greater risk of not recovering the loan balance and interest payments. For this reason, non-recourse loans are not offered by most financial institutions - but some banks, online lenders and private lenders will grant this type of debt.

Residential mortgages - although generally with a right of recourse - are without a right of recourse in 12 states: Alaska, Arizona, California, Connecticut, Idaho, Minnesota, North Carolina, North Dakota, Oregon, Texas, Utah and Washington. If a homeowner defaults in one of these states, the lender can foreclose on the secured home, but cannot go after the borrower's other assets.

Example of a non-recourse loan

Consider a home buyer who takes out a mortgage of $ 250,000 to buy a house with an appraisal value of $ 300,000. If the homeowner defaults on $ 230,000 of the loan, the bank can foreclose on the secured property to try to recover the outstanding debt. However, in some states, not least Florida, if the local real estate market is flooded with inventory and the house can only be sold for $ 215,000, the lender will not be able to recover the additional $ 15,000 through wage garnishment or other means.

Loan with right of recourse vs. Loan without right of recourse: which is better?

Regardless of whether a secured loan is with or without a right of recourse, the creditor can seize the debtor's collateral in the event of default. The main difference is that with a non-recourse loan, the creditor can only seize the specific collateral - even if it is worth less than the outstanding debt. With a co-obligation loan, however, the lender can seize the borrower's secured assets and - if it can't recover the outstanding loan balance by selling that collateral - it can then go after the borrower's other assets.

The best loan option depends on the borrower's needs, creditworthiness and confidence in their ability to make payments on time. You are likely to get a right of return loan if:

  • You have a poor credit history or a high debt-to-income ratio. In addition to lower interest rates, right-of-return loans also have more lenient loan approval requirements. If you have a low credit score or a high debt-to-income ratio - meaning that a large percentage of your income goes towards servicing the debt each month - you're more likely to get a right-of-return loan.
  • You want a lower interest rate. Right of recourse loans are not as risky for lenders as non-right of recourse loans because lenders have more flexibility to recover outstanding debts in the event of default. For this reason, lenders can offer more competitive interest rates for right of recourse loans than for non-right of recourse loans.
  • You're taking out a loan to buy a car or a credit card Certain types of debt - such as credit cards and car loans - are usually structured as recourse debt. For this reason, borrowers must agree to recourse loan terms if they want to take advantage of many traditional financing options.

Loans with no right of recourse may be an option if you:

  • Can meet stricter approval requirements. In rare cases, borrowers with a high credit score and a low debt/income ratio can get a loan with no right of return.
  • They are willing to pay a higher interest rate. Similarly, a higher interest rate protects lenders who are exposed to riskier non-recourse loans.

How to determine the type of loan

Generally speaking, it doesn't matter if your loan is in a right of recourse state or not, unless you are delinquent on your loan payments. However, if you want to know whether or not your home mortgage is outstanding, start by determining if you are in a right of return state, such as Florida, as listed above.

If you have another type of debt, such as a car loan or credit cards, you can determine the type of loan by reviewing the original loan documents or contacting the lender directly. If you confirm that you have a right of recourse loan and think you may default, talk to your lender about options to avoid default - such as forbearance or loan modification. You should also work with your lawyer or accountant to assess the implications of default, foreclosure and possible wage garnishment.

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