Most of us have heard of recourse loans, or lien loans, at some point in our life. However, for those who are unaware, recourse loan debt is essentially a debt which is secured by collateral against the borrower’s assets. Also referred to as a nonrecourse loan, this kind of debt allows the bank to retrieve the assets of the borrower in case of nonpayment from the borrower and his/her assets as opposed to simply foreclosing on the property or asset itself. In other words, recourse loan debt protects the bank’s investment. When dealing with this form of loan debt, it is important to note that there can be a high interest rate attached to this debt due to the high risk of not only the borrower not being able to make the monthly payments, but also if the bank is able to collect the debt in the event of nonpayment from the assets of the borrower. With that being said, the advantages of recourse loans are that they offer low interest rates with flexible payment options.
There are different types of recourse loans available to a borrower. There is the unsecured loan, which is also commonly known as an “uninsured loan” which does not require the submission of any assets as collateral. This type of loan also has a relatively low interest rate due to the lower risk of nonpayment to the lender. With that being said, an unsecured loan is not advisable for those who already have too many liens or too much debt against their current home or car loan.
Second, a recourse loan may also be called a “promise ring” since it serves as a promise bond between the lender and the borrower. This means that although the borrower does not pay back the loan, the lender will receive money that is contingent upon the performance of a series of tasks. These tasks can result in interest or principal payments to the lender if the borrower fails to make his or her loan payments.
In some instances, a recourse loan can be referred to as a “security” on a property. However, when taking out a loan against a property, the borrower’s name and lien on the property will remain intact so long as the loan is repaid. Once payment is complete, the property will revert back to the borrower and will no longer be owned by the lending company. The only reason the property will revert back to the lending company is if the borrower fails to make payment on the loan.
As with any other form of secured loan, the borrower will be required to post a certain amount of money as collateral. However, unlike a conventional loan, which only requires the borrower to post collateral, a recourse loan requires the person borrowing the money, which is referred to as the “receiver”, to post a certain monetary value, called the “collateral”. If the receiver fails to repay the loan on or before the due date, the lender may take possession of the property involved in the loan and sell it at auction or private sale. This is referred to as taking “re recourse” or “re recourse liability”.
When a recourse loan is taken out against property, the loan provider will not consider the property to be used as collateral. Thus, it may be taken out even if the owner has poor credit, has declared bankruptcy, or has otherwise failed to show the ability to pay off the loan. In some states, there are restrictions on the amount of property that can be taken in these circumstances. There may also be limits to the number of times that this type of loan can be taken out against a single property.
Some borrowers worry about nonrecourse loans. They argue that if they fail to repay the loan they are at risk of losing their home, or their business, to the lender. However, while a recourse loan does require that the property be sold if payment is not made, the property itself is never at risk. If the borrower sells the property and wishes to remain in ownership, this too is not at risk. In fact, if the property ends up in foreclosure, the borrower can have his or her home sold to recover the remainder of the loan; thus, the recourse loan serves as insurance against foreclosure.
There are many perks and benefits to opting for a recourse loan instead of another type of loan. First, the rates are often higher than those for other types of loans because the lender is assuming more risk by requiring full payment upfront. Second, the lender may have more creative schemes for disbursing payments in order to keep the business going. Finally, the payment scheme allows borrowers to avoid dealing with the intricacies of arranging for conventional loans.
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