November 3, 20152 min read
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Some lenders will allow a borrower to secure a loan through a non-recourse debt pledge. This entails the lender pledging a form of collateral, i.e. real estate or property, for which the borrower is not personally liable.

Non-recourse debt (loan) can be considered a high-risk loan for lenders. If a borrower defaults, the lender can then seize the collateral.

The legal proceedings of both recourse and the non-recourse loan will be different in each state.

The difference between recourse and non-recourse loans

The Internal Revenue Service differentiates between two categories of loans, recourse and non-recourse loans:

  • Recourse Loan: If a loan has not yet been fully repaid, a lender can collect items for the owed debt even after they have collected the collateral. This form of debt will also allow lenders the right to garnish wages and levy accounts.
  • Non-Recourse Loan: When a borrower defaults, lenders can only collect the agreed-upon collateral. An everyday example of non-recourse debt or loans involves the repayment of home loans. In case a borrower defaults, the bank is allowed to foreclose the home but further legal steps can be taken to collect money owed on the loan.

Why use a non-recourse loan/debt?

Borrowers will undergo a non-recourse loan or debt to help secure their finances. This form of debt offers no personal liability to any of their assets, or to which they have offered as collateral.

This enables borrowers to have better security over their wages, and personal liability. As no legal action can be taken by the lender if a borrower defaults. Lenders do have the right to obtain the agreed collateral such as property or real estate to repay the loan.