# Non-Recourse vs. Recourse Debt Explained: Definitions and Examples

Non-recourse debt is a loan secured by collateral like property. If a borrower defaults, the lender can seize the collateral but bears a greater risk without pursuing further compensation. Unlike recourse debt, where lenders can seek out borrowers to cover any remaining debt after seizing collateral, non-recourse loans offer more borrower protection. This guide explores the implications, risks, and examples of both types of debt, helping you understand which is more suitable for your financial situation.

### Key Takeaways

*   Non-recourse debt is secured by collateral, typically property, and the lender cannot pursue the borrower beyond the collateral if a default occurs.  
    
*   Lenders charge higher interest rates on non-recourse debt due to the increased risk of borrower default.  
    
*   Non-recourse loans are characterized by high capital expenditures, long periods, and uncertain revenue streams.  
    
*   Recourse debt allows lenders to claim remaining balances from borrowers after seizing and selling collateral.  
    
*   The legal classification of a loan as recourse or non-recourse often depends on state law.

## What Sets Non-Recourse Debt Apart?

Non-recourse debt is riskier for lenders than recourse debt, especially if the collateral's value drops below the amount owed.

[Recourse debt](https://www.investopedia.com/terms/r/recourse.asp) lets lenders seek more money from borrowers if collateral doesn't cover the debt. Hence, non-recourse loans usually have higher interest rates due to the added risk.

## Comparing Recourse and Non-Recourse Debt

Recourse debt allows creditors to collect the full debt amount from the borrower if they default. Both unsecured and secured personal loans can be recourse debts where the borrower assumes all risk and is personally liable. After liquidating the collateral, any balance that remains is known as a deficiency balance.

The lender may attempt to collect this balance by several means, including filing a lawsuit and obtaining a [deficiency judgment](https://www.investopedia.com/terms/d/deficiency-judgment.asp) in court.

When a debt is non-recourse, the lender may liquidate the collateral but may not attempt to collect the deficiency balance. In [non-recourse loans](https://www.investopedia.com/crossover-loss-definition-5223721), the bank takes on most of the risk. 

> **Important**
>
> For non-recourse debt, creditors can only take and sell the collateral if the borrower defaults. 

## Example: How Non-Recourse Debt Works in Practice

If an auto lender loans a customer $30,000 at zero interest for a five-year loan to purchase a new vehicle, the new car's value, historically, will decline in value following the purchase. If the borrower stops making [car payments](https://www.investopedia.com/articles/personal-finance/061615/how-interest-rates-work-car-loans.asp) after one year, the vehicle may be worth only $22,000, yet the borrower still owes $26,000.

With the customer's default, the lender repossesses the car and liquidates it for its full market value, leaving a deficient balance of $4,000. If the loan was a non-recourse loan, the lender assumes the loss.

## When Is a Loan Issued As Non-Recourse?

Whether a debt is a recourse or nonrecourse loan often depends on state law.

Some states may require that all mortgages are nonrecourse debt and in the instance of a default, lenders cannot pursue a deficiency judgment after collateral has been seized.

## Who Can Qualify for a Non-Recourse Loan?

Because non-recourse debt poses a greater risk to the lender, a borrower may need high credit scores and a low [loan-to-value ratio](https://www.investopedia.com/terms/l/loantovalue.asp). The interest rates on non-recourse loans may also be higher to compensate for the risk.

  

## How Are Liabilities Paid for a Recourse Loan?

After collateral has been seized, a deficiency judgment may levy the borrower's bank accounts or garnish wages to repay the debt balance.

  

## The Bottom Line

Non-recourse debt involves significant capital expenditure, extended loan terms, and unpredictable revenue streams, presenting more risk to lenders. Consequently, lenders demand higher credit standards and charge increased interest rates to mitigate this risk. Borrowers are not personally liable if they default, as collateral is the sole security for the loan. Understanding these factors is crucial for both lenders and borrowers considering non-recourse financing.

> **Article Sources**
>
> 1.  IRS. "[Recourse Vs. Nonrecourse Debt](https://apps.irs.gov/app/vita/content/36/36_02_020.jsp)."
>     
> 2.  SoFi. "[What Are Non-Recourse Vs. Recourse Loans?](https://www.sofi.com/learn/content/what-is-a-non-recourse-loan/)"