What is a Recourse and Non-Recourse Loan?
A debt may be classified by a licensed money lender under two categories which are “Recourse Debt” and “Non-Recourse Debt”. It is essential for a borrower to understand these categories to ensure the scope in which the lending company has on collecting the debt owed.
Missing to understand the information regarding these categories often put the debtor under more exposure when unexpected circumstances occur.
As planning is important prior to taking a loan, understanding these categories will help the debtor secure the income and assets required for backing up the flexible loan.
- Recourse Loan
A recourse loan is a type of debt where a lender has the capacity to seek recovering the financial damages from the borrower in cases of default.
In cases where the recourse debt is secured with a collateral, the lender will have the capacity to collect any deficiency from the proceeds of the secured asset. The lender can go after other assets owned by the borrower to pay for the deficiency.
- Non-Recourse Loan
Non-Recourse Loan on the other hand is a type of loan that limits the collectability of the lender if debtor defaults in paying the assets. A loan that is secured with a collateral does not necessarily mean that it is a recourse loan. There may be instances where a non-recourse loan can be a secured loan. The problem disadvantage of a non-recourse loan to a lender is that their collectability on default is limited to the value of the asset that has been placed collateral. Oftentimes on these types of personal loan singapore, the lender requires a collateral that either appreciates in value or depreciation is slower compared to other assets.
The protection that a borrower has depends on the category of loan in which the lender grants a borrower. This is specifically mentioned in the fast cash loan agreement to be clear on how the lender can protect itself from the debtor’s default. The only protection a lender has on a non-recourse loan is the value of the collateral to be used in recovering the losses. This is why a lender carefully reviews the risk and value of the collateral when granting a non-recourse type of debt.