If you are browsing the world of loans, it’s very crucial to understand what kind you are getting. There are two main types of loans offered, recourse and non-recourse loans. But what is the difference between them? Continue reading to find out more!
As stated, borrowers have two options to choose from, recourse and non-recourse loans. Both of them have their own set of pros and cons, so it’s important to understand their differences before making a decision.
When talking about recourse loans, with this type, borrowers are personally responsible for repayment. In other words, if you halt the loan, the lender can come after your money. On the other hand, with non-recourse loans, borrowers are not personally responsible for the repayment. So, if you halt the loan, the lender is going to take the collateral that you put to secure the loan instead of your money.
A great thing when it comes to a recourse loan is that they usually come with lower interest rates in comparison to a non-recourse loan. But their downside is that if you default on the loan, you can be at risk of losing your personal assets.
A non-recourse loan has the opposite advantages and disadvantages. With this type of loan, interest rates are higher, but you are not at risk of losing your personal belongings if you default on the loan.
Recourse loan or non-recourse loan, which one to take? Well, it all depends on your needs and circumstances. If you are confident that you can repay back the loan without putting collateral, then you should go for a recourse loan. While on the other hand, if you are not sure you can do it, the better option for you is a non-recourse loan.
What Exactly Is a Recourse Loan?
We brushed over a bit what is a recourse loan, so here we will explain more. The recourse loan definition is very simple. With this type of loan, you, a borrower, are not putting any collateral to secure the loan. That way, if you halt the loan, the lender goes directly to your personal belongings to recoup the loss. In other words, if you default on the loan, the lender can come after you for the money.
Another great thing this type of loan brings is that they usually come with lower interest rates. This can be a good thing if you don’t want to spend a lot of money on interest fees. Just make sure you are able to repay it back in time.
With that said, it’s always good to know your financial possibilities before taking out any type of loan.
Examples of Recourse Loans
A recourse loan is a type of loan that gives the lender the full right to go after the borrower’s personal assets if the borrower defaults on the loan.
Here we will give you some examples of recourse loans:
- Home mortgage loans – With this type of loan, if you are unable to repay the loan back, the lender goes for your other assets, such as your savings or a car.
- Business loans – Here if you halt the loan, the lender as well can take your savings or your business assets.
- Credit cards – This is as well a type of recourse loan, where the lender goes directly for your personal assets, like your house or a car.
What Exactly Is a Non-Recourse Loan?
We explained recourse loans and how they work, so now we will give you an explanation of non-recourse loans. A non-recourse loan definition is different since, with this type, you are putting collateral to secure it. So what this means is that if you default on the loan, the lender can seize your car or a house.
Non-recourse loans are usually used by investors who are buying properties with the intention of flipping them fast. They are typically putting that property or a house as collateral, so if they don’t repay the loan, the lender takes that instead of their own house. These types of loans are also used by people who are buying vacation homes or investment properties.
So, if you are considering a non-recourse loan, it is important to understand that you will have to pay a higher interest rate.
Examples of Non-Recourse Loans
Non-recourse loans are not as common as recourse loans, but they do exist.
Here are a few examples of non-recourse loans:
- Home equity lines of credit – With this type of loan, your house is your collateral. So if you default on the loan, the lender is going to take it.
- Auto loans – This is counted as a non-recourse loan as well. In this case, if you half the loan, the lender can take or sell your car.
- Student loans – If you are unable to repay this type of loan, the government can take your student aid.
Recourse vs. Non-Recourse Loans: What’s the Difference?
Throughout this article, we explained more about recourse and non-recourse loans. They both have their pros and cons, but what are recourse and non-recourse loans comparisons?
If you are considering taking out a recourse loan, keep in mind that you are not putting collateral, so if you are unable to repay the loan, the lender goes directly for your personal assets to recoup their loss. The lender can go for your home, a car, investment, or anything else valuable that you have.
On the other hand, if you are considering a non-recourse loan, you will be obligated to put up collateral to secure the loan. That way, if you default on the loan, the lender goes for your collateral and not your personal assets. There are many things you put as collateral, such as your car, a house, or even jewelry.
Now that you know the difference between these loans choosing the right one solely depends on you and your needs. Just make sure you understand how both of them work and if you can afford them.
Recourse vs. Non-Recourse Loans: Which Is the Best Option?
Both of these types of loans can be a good fit, depending on what you are planning to use them for. Although we can’t tell you for certainty which one to go for, we gave you a rundown of what they bring.
To summarize, recourse loans have better terms in regards to interest rates being lower and having more flexible repayments. Even with all of that, since you don’t put collateral to secure the loan, be sure that you can repay it back if you don’t want to lose your personal assets.
With non-recourse loans, you are in obligation to put collateral in order to secure and get the loan. They as well tend to have higher interest rates and set terms of repayment. Make sure that you are okay with losing your collateral, such as your house or a car if you halt the loan.
Before you decide to take out any of these two loans, shop around and compare different lenders.
In this article, we gave a better explanation of how non-recourse vs. recourse loans work. Even though we can’t make a decision for you, we hope this helps.
At the end of the day, whatever loan you go for, just make sure you are aware of the risks they bring. If you don’t want to put collateral to secure the loan, but you are sure you can repay the loan back, the better option for you is a recourse loan.
But on the other hand, if you are okay with putting your house, a car, or even your investment as collateral in case you halt the loan, then you should go for a non-recourse loan.
Just make sure you compare different lenders and their offers before signing your name on the dotted line.