Recourse vs Non-Recourse Loans. What is the difference? You may hear about Non-Recourse Loans and wonder what that is all about and how can you get one.
Let’s start with Recourse Loans first which is the typical loan you may sign at a bank or credit union when you borrow money for a car or a home or commercial building. You usually sign the promissory note in your own name or your companies name and you are responsible for making the payments on that loan. And if there is a default on the loan, you as the borrower can be sued for the unpaid balance of the loan.
On a Non-Recourse Loan, you do not sign the loan as the borrower and have no personal obligation to pay the loan back. These types of loans are used when a Retirement Plan (IRA, 401K, etc.) borrows money for a real estate purchase for example. The IRA custodian itself signs the loan, not the person who’s IRA is actually borrowing the money. Or in the case of a LLC where the Member’s of the LLC are IRA’s, the manager of the LLC signs the loan promissory note, but the person’s involved with the IRAs in the LLC do not sign the note personally. And in any default on the loan, the bank can only sell the collateral if there is any and recoup funds in that manner, but in no way can the lender sue or go after the person who’s IRA actually borrowed the funds.
So Non Recourse Loans have no personal guaranty and no personal obligation to pay back the loan, whereas a Recourse loan allows the lender to take action against the borrower if there is a default on the loan and use whatever means is allowed by law to collect the unpaid debt.