What is a recourse loan?
A recourse loan is a type of loan whereby the lender can seek financial damages in the event that the borrower defaults in his loan payments. With a recourse loan, if the value of the asset used as collateral is not enough to cover the loss, the lender may seize other assets or extract compensation on top of the collateral.
With a recourse loan, lender is given permission to seize the assets of the borrower that are not included in the loan agreement as collateral. This can happen if the collateral used for the loan is liquidated or foreclosed on and or is not valuable enough to cover the total amount borrowed.
Recourse loans are commonly used in real estate financing and construction. Other than physical assets, lenders can also take garnishments from the borrowers’ salaries and bank accounts. The lender can even go after a loan guarantors’ assets to cover its losses.
The loan agreement in such a situation will stipulate what can and can’t be used as recourse. When the loan gives the lender full recourse, it can take whatever it wants from the borrower. Otherwise, in a limited recourse loan, the assets that bank can seize will be named.
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Recourse loan example
Marla buys an expensive item using a personal loan that stipulates that if she can’t pay it back then the lender can seize her assets. Unfortunately, she becomes delinquent on the loan and eventually defaults. The bank sues for financial damages and gets a judge to agree to garnish Marla’s wages in order to pay back the loan.