For lenders, minimizing risk is the name of the game. That’s why bigger loans have strict requirements and why only the most reliable borrowers get the best interest rates. However, some lenders may go even further in reducing risk by offering recourse loans.

Recourse loans allow the lender to seize many of the borrower’s assets if the borrower fails to repay their loan — even assets that were not included in the loan agreement as collateral. It reduces risk for the lender, which means you may be able to score the lowest rates. But since that risk may mean losing valuable assets, you need to be sure you can repay before you agree to borrow.

Key takeaways

  • You are considered personally liable with recourse loans.
  • Lenders can seize assets not listed in the loan agreement.
  • Less risk for the lender often means lower interest rates.

Types of recourse loans

When you take out a loan, you agree to a contract that specifies what actions the lender can take if you default. Personal loans, auto loans, credit cards and short-term real estate loans are all considered recourse loans. 

Most mortgages are also recourse loans. However, there are 12 states that allow nonrecourse mortgages, which means the lender will only be able to repossess the home — not any other assets or sources of income. 

All government-backed mortgages are also nonrecourse loans, even if you don’t live in a nonrecourse state. This means the lender cannot come after any assets except for your home if you default on a VA, USDA or FHA loan.

An example of a recourse loan

Let’s say you take out an auto loan to buy a car. If you stop making payments, the lender can legally repossess the vehicle.

If the value of the vehicle is less than the remaining balance on the loan, your lender is able to seize your other assets to recoup its loss. For example, let’s say you took out a car loan and stopped making payments after one year, at which point the lender seizes the car. At this time, the car is only worth $12,000 — but you still have $14,000 left on the loan.

The lender needs $2,000 to break even on the loan. If you have a recourse loan, the lender can then ask a court to garnish your wages until you’ve paid off the $2,000. It may also be able to recoup funds by taking your tax refunds, pension checks, Social Security checks and more.

Recourse loan vs. nonrecourse loan

In short, a recourse loan is when a lender can seize any asset, including and beyond the item used to secure the loan. By contrast, if you default on a nonrecourse loan, the lender can only take the asset associated with the loan. 

Because lenders face a potential loss with nonrecourse loans, many do not offer them or reserve them for borrowers with the highest credit scores. They may also have a higher down payment requirement in the case of mortgages or auto loans. 

Recourse loans are potentially more damaging to borrowers than nonrecourse loans, but they’re also more popular with lenders. If you’re currently carrying any form of debt, there’s a good chance that it’s a recourse loan.

Should I get a recourse loan?

In general, a nonrecourse loan involves less risk. But they are much more difficult to qualify for. So while your financial situation will determine which is best, in most cases, you may be unable to find a nonrecourse loan. 

A recourse loan is a good choice if you want to find a competitive interest rate. They almost always come with more favorable interest rates than nonrecourse loans because there is less risk for lenders if you are unable to repay your debt.

A nonrecourse loan is best if you have an excellent credit score. Lenders typically have higher lending standards for nonrecourse loans and mostly offer them to borrowers who have the best credit scores.

The bottom line

If you already have a recourse loan, your best course of action is to pay your bills on time. If you’re worried about defaulting and have a recourse loan, you should contact your lender and ask about your options.

If you are deciding between a recourse loan and a nonrecourse loan, weigh the pros and cons. You may pay more interest on a nonrecourse loan, so if you have a stable job and low debt-to-income ratio, you may decide to take a small risk and choose a recourse loan.

Frequently asked questions

  • The 12 states that consider mortgages nonrecourse loans are:
    • Alaska.
    • Arizona.
    • California.
    • Connecticut.
    • Hawaii.
    • Idaho.
    • Minnesota.
    • North Carolina.
    • North Dakota.
    • Texas.
    • Utah.
    • Washington.
  • It will depend on the laws of your state and your financial situation, but your lender may be able to garnish your wages or seize a high-value asset if you default on a recourse loan.
  • Like any debt cancellation, there will be tax implications. This is especially true for secured loans like mortgages. If you are personally liable for the debt — which is the case for a recourse loan — you will need to report it on your taxes. In other cases, your tax refund could be garnished to pay back a lender if the sale of the asset wasn’t enough to cover the amount you owe.