The world of finances can definitely be a tricky one to understand, with so much confusing terminology and tiny differences between borrowing options and repayment plans. So, in hopes of clearing up some of the confusion, here’s a small guide to something called a non recourse loan.
What is a non recourse loan?
A non recourse loan is considered a “secured” loan, meaning that some sort of collateral is involved in the agreement to ensure that the debtor pays back the lender. Unlike unsecured loans, which are often much riskier for borrowers, a non recourse loan agreement states that the lender is allowed to seize certain pre-specified properties if the debtor fails to repay the total money owed. If the debtor fails to repay the full amount, he/she isn’t held personally responsible, and won’t have to deal with harassment from debt collectors; the non recourse lender simply takes the property that was agreed upon as collateral, sells it, and keeps whatever profits were made from the sale.
When are non recourse loans used?
Because non recourse loan agreements give the borrower extra security in regards to payments, non recourse loans are often used to fund major investments, especially those involving real estate, which would require a long repayment period. These are often known as non recourse commercial loans, simply because they’re a bit more tailored to fit the needs of borrowers investing in commercial properties.
What are the benefits of a non recourse loan agreement?
As stated above, non recourse loans involve a specified collateral to which the lender is entitled, should the debtor default on his/her payments — and that’s the main benefit of these loan agreements. Non recourse loans are a little riskier for lenders, because they usually involve long repayment periods, and if the lender isn’t able to resell the collateral for what it’s worth, then the total amount of debt may never be repaid. For borrowers, however, these loans are beneficial because the lender cannot seize more property than the pre-determined collateral.
Now it’s your turn to share — is there anything important about non recourse loans that we forgot to include? Any important questions you would like to be answered? Be sure to leave any comments, questions, or answers for us!