Non-Recourse Loan vs Recourse Loan: What’s the Difference?
Should you take out a recourse or a non-recourse loan?
In many cases, lenders prefer recourse loans while borrowers would rather take out non-recourse loans. But which option is better for you?
Take a look at this guide to learn the difference between recourse and non-recourse loans.
What Is a Recourse Loan?
The main difference between a recourse and non-recourse loan comes down to what kind of assets a lender can seize if a borrower fails to pay a loan.
For example, let’s say you took out a recourse loan to buy yourself a new car. After a time, you hit some bad luck and are unable to pay the rest of your auto loan.
The lender takes your car to repay the rest of the debt you own them. But if the car has gone down in value since you bought it, the car might not be enough to cover the cost of the loan.
Because you have a recourse loan, the lender has the ability to go after other assets to make up for the lost value.
What Is a Non-Recourse Loan?
To understand the difference between recourse and non-recourse loans, we’re going to set up a similar situation.
You take out a loan to buy yourself a new car, but this time you get a non-recourse loan. Once again, you’re unable to pay your loan, and the lender seizes your car to make up for the loss.
Here’s where it changes.
Even if the value of the car has gone down, a non-recourse loan doesn’t permit a lender to take other assets. If your car doesn’t cover the rest of the loan, they’re simply out of luck.
“One-Action” Recourse States
Some recourse states have a rule in place to protect borrowers from their lenders. The “one-action” rule gives a lender a single chance to collect the assets they need to cover a borrower’s debt.
In other words, a lender can’t seize your car one day and then sue you a month later. This protects borrowers from the potential chance of lender harassment.
It’s important to remember not every recourse loan state has this “one-action” rule. It depends on where you live.
Which Type of State Do I Live In?
The exact laws can vary from state to state. Because of this, it’s difficult to categorize each one as a recourse or non-recourse state. However, for the most part, the states separate into these basic groups.
- North Carolina
- North Dakota
- New Hampshire
- New Jersey
- New Mexico
- Rhode Island
- South Carolina
- South Dakota
- West Virginia
- New York
Understanding the Difference Between Recourse and Non-Recourse Loans
If you have a recourse loan, a lender can seize extra assets outside of the original loan to cover your debt. If you have a non-recourse loan, the lender can only take the item you purchased with the loan.
Are you interested in taking out a loan? Head over to our contact page and let us know how we can help you.