Non Recourse Debt – All You Need to Know with FAQs
For free & impartial money advice you can visit MoneyHelper. We work with The Debt Advice Service who provide information about your options. This isn’t a full fact-find, some debt solutions may not be suitable in all circumstances, ongoing fees might apply & your credit rating may be affected.
For free & impartial money advice you can visit MoneyHelper. We work with The Debt Advice Service who provide information about your options. This isn’t a full fact-find, some debt solutions may not be suitable in all circumstances, ongoing fees might apply & your credit rating may be affected.
There can often be a lot of confusion between different terms when it comes to dealing with and managing debt.
People are often confused about recourse and non-recourse debt and how they relate to secured debt.
I explain non-recourse debt, how it works and some important things about it that you should be aware of.
What is Non-Recourse Debt?
Non-recourse debt refers to debt that has been incurred due to a non-recourse loan. A non-recourse loan (also known as a limited recourse loan) is secured with an asset that is put up as collateral.
If the borrower defaults, then the lender has the right to seize the asset(s) that you had put up in your initial agreement.
However, in the case of non-recourse debt, you (the borrower) are not personally liable for any shortfall between the total amount of the debt and the sum the lender will receive from seizing your asset(s).
What this means is that if you default on your payments and your lender seizes your asset(s) and sells them off but is still not able to recoup all of their money, then your lender can’t contact you again and ask you for more payment.
Your lender can only collect the collateral, and that’s it. They will not be able to go after any other assets of yours. They will have to take the loss.
Of course, a non-recourse loan would be great to go for, but getting approved for it as a borrower can prove to be quite difficult.
Obviously, a lender will favour recourse loans over non-recourse loans. You will most likely be approved for a non-recourse loan as a borrower if you have an excellent credit score.
A great credit score will assure your lender that you will be able to make your payments on time and will be able to take care of your debt reliably.
Not to mention that non-recourse loans typically have much higher interest rates as compared to recourse loans.
Another thing to keep in mind is the effect it will have on your credit score.
When you default on your loan, only the asset(s) you mentioned in your agreement will be seized and nothing else. While your other assets will remain safe, your default will still be recorded in your credit history.
This will have an extremely negative effect on your credit score. This will make it much harder for you to secure any type of credit as a borrower in the future.
A typical example of non-recourse loans would be mortgages. Contrary to popular opinion, only the home itself can be used as collateral in a mortgage loan.
If you fail to make payments towards the loan, the bank can seize your home and sell it off in order to take care of the debt.
The lender cannot go for any remaining amount left on the mortgage. They’ll have to take that loss.
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What is Recourse Debt?
Recourse debt is incurred due to a recourse loan. Similar to a non-recourse loan, you have to put up an asset or assets as collateral in case you start missing your payments.
If you default on your loan or are continuously late on your debt payments, then your lender has the right to seize your assets and sell them off in order to pay your debt.
If selling off your assets does not take care of your debt completely, then your lender has the right to pursue you further and maybe seize even more assets of yours.
As you can probably tell, non-recourse loans benefit borrowers, whereas recourse loans benefit lenders.
Recourse loans give lenders a much higher degree of power. They have fewer restrictions on what assets they can claim against for the loan’s repayment.
A lender may propose a recourse loan if they feel you won’t be able to make your payments on time. This is because a recourse loan reduces the perceived risk that all lenders need to take into account.
Since the risks involved with recourse loans are much lower for lenders, they usually charge a much lower interest rate for them. This can be attractive to a borrower with little or no credit or to a borrower who is struggling with their finances.
These loans become fairly commonplace when banks and other financial institutions start becoming stingy with giving out loans. Lenders also ease up on how much money they lend to borrowers when the economy is in a bad state.
Since credit is difficult to come by during a struggling economy, borrowers are also willing to agree to more restrictive terms, such as giving up their assets.
Most car loans are recourse loans. If you default on your payments towards your car loan, your lender may seize your car and sell it off at full market value.
It’s highly likely that the amount your lender receives from selling off your car will be much lower than the value of your loan.
This is because the value of a car falls significantly once it has been driven off the lot.
Since there’s almost always an outstanding balance left on the loan once the car has been sold off, car loans are almost always recourse.
Your lender would have the right to pursue you in court as well as outside of it in order to recover the remaining loan amount from you.
As a borrower, you will have a responsibility to pay back the entirety of the outstanding balance. This would include any interest as well as additional charges that may have been added to it.
Thus, it’s very important that you keep a close eye on your finances.
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What About Unsecured Debts?
Unsecured loans can’t really be categorised as recourse or non-recourse loans since they don’t have any collateral associated with them.
Any type of unsecured credit debt, such as credit cards or personal loans, does not have any type of collateral associated with it.
This means that when a borrower defaults, the lender may pursue the borrower for the debt, but they cannot seize any assets immediately as they were not part of the agreement.
Keep in mind that your assets could still be seized even in the case of unsecured debt if you have a County Court Judgment (CCJ) taken out against you.
If you have a CCJ taken out against you and you refuse to make payments towards it, bailiffs may show up at your home and seize your goods in order to pay for your debt.
If you’re having trouble securing a loan or are unsure about what type of loan to go for, I highly suggest contacting an independent debt charity for advice.
Charities such as StepChange have trained professionals who would assess your situation and suggest what approach would be best for you.