Recourse and non-recourse loans, regardless of what they are used for, vary in many ways. With a recourse loan, all debt is the responsibility of the borrowers, and they are legally required to pay it back in full. This means that if borrowers default on loans and stop making payments, the bank or other lending institution can come after them for the remaining debt. Recourse loans include most types of secured loans, and even allow the creditor to garnish wages and levy accounts to get what is owed to them. Most home loans and credit card debt are considered recourse loans, as well as many others.
Non-recourse loans as opposed to guarantor loans are those that are unable to be collected by the lender should the borrower default. Lenders can still go after the collateral, of course, but they are not allowed to garnish wages or perform any other tasks in order to get the money that is owed to them, including a variety of legal actions. Both recourse and non-recourse loans’ specifics vary from state to state, so it is advisable to learn the laws concerning these loans in the state where you live.
The Basics of Recourse and Non-Recourse Loans
The main advantage of a non-recourse loan is that the lending institution cannot come after anything except your collateral should you default on the loan. This is not a reason to default, of course, since ceasing payments on a debt you signed for not only affects your credit in a negative way, but also can affect any future loans you may be interested in obtaining. Regardless of the circumstances, it is always best to pay off a debt completely to avoid ruining your credit score and, therefore, your financial well-being.
How do you know if the loan is a recourse or non-recourse loan? Simple – by asking the lending institution. In fact, you can even research online about the lenders that offer each of these types of loans, so you can know beforehand what courses of action would be available to them during the life of the loan. As with many other areas in life, it is always best to be prepared.
Non-Recourse Loans Can Be More Complex than Recourse Loans
The specifics of recourse versus non-recourse loans vary, but more often than not, lenders that offer non-recourse loans offer them at higher interest rates. This is because in the case of a default, the lender has less of a chance to recoup what is owed to them, and there is a bigger risk overall. Of course, you can always take out one of these loans, and then pay a little extra on the principle each month so that the loan is paid off sooner. This means you will be paying less interest throughout the life of the loan. Regardless of what you decide, however, learning the specifics of each of these types of loans is crucial if you are to end up with the right type of loan for your needs.