What is the Difference Between Recourse and Non-Recourse Debt?

The main difference between recourse and non-recourse debt lies in the lender's ability to pursue the borrower's assets in case of default. Here are the key differences between the two types of debt:

Recourse Debt:

• Holds the borrower personally liable for the debt.
• Lenders can pursue additional assets of the borrower beyond the collateral if the debt's balance surpasses the collateral's value.
• Allows lenders to garnish wages or levy accounts to collect what is owed.
• Commonly found in auto loans, credit cards, and home mortgages in most states.
• Typically has lower interest rates, as they pose less risk to lenders.

Non-Recourse Debt:

• Does not hold the borrower personally liable for the debt.
• Lenders can only pursue the collateral specified in the loan agreement, even if its value does not cover the entire debt.
• Favors the borrower, giving them more protection against asset seizure in case of default.
• Found in certain types of loans, such as home mortgages in 12 non-recourse states.
• Generally has higher interest rates and more restrictive borrower qualifications than recourse debt.

In summary, recourse debt allows lenders to pursue the borrower's personal assets in case of default, while non-recourse debt limits the lender to seizing only the specified collateral. Recourse debt is more favorable to lenders and usually has lower interest rates, while non-recourse debt is more favorable to borrowers and typically has higher interest rates.

Comparative Table: Recourse vs Non-Recourse Debt

The main difference between recourse and non-recourse debt lies in the lender's ability to pursue the borrower's personal assets in case of default. Here is a table summarizing the differences between recourse and non-recourse debt:

In summary, recourse debt allows the lender to pursue the borrower's personal assets in case of default, while non-recourse debt limits the lender to the collateral itself to recoup losses. Recourse debt generally has lower interest rates and is more commonly used for assets that are easier to liquidate. Non-recourse debt, on the other hand, is more commonly used for "strong" assets and locations and typically has higher interest rates.