Recourse refers to the legal contract that enables the lender to use the pledged Collateral if the borrower doesn’t make the debt payments. It gives banks and lenders the right to collect payments from the borrowers. This legal agreement guarantees payment to the lender. With recourse lending, the lender can rest assured that they will get their money back either in the form of cash or assets.
The institutions that use the recourse lending method charge lower interest and have a low cost of Capital as it does not involve any form of risk. Recourse makes lending less risky for lenders.
Recourse acts as the legal rights of the lender to seize the property or assets the borrower has used as the collateral for borrowing money. If the borrower is unable to make the loan repayments on time, the lender can seize all the assets. If the agreement states that the entire debt amount is recourse, then the borrower will have to pay this amount in full within the given deadline. Note that the lender has the right to seize the collateral even if its size and value goes beyond the amount they have lent to the borrower.
In addition to the collateral, the lender has the right to use other assets owned by the borrower in order to repay the outstanding balance. This happens when the value of the collateral does not pay the full amount. That means the lender can seize the unpledged assets that are not used as collateral to recover the remaining amount. In fact, the lender can use the Income sources of the borrower, such as investments, retirement savings, interest on fixed deposits, and more.
Non-recourse loans do not give lenders the right to claim anything other than the pledged asset. No matter what securities the borrower has used for collateral, the lender’s right is limited to the pledged assets only, even if the assets used as the security have low liquidity. If the borrower fails to pay back the loan in full and the pledged assets they have used for collateral are not enough to recover the amount, then the lender cannot claim other assets of the borrowers to get their money back.
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If the non-recourse debt has been used, the lenders will have the right over the pledged collateral only. The main difference between the recourse and non-Recourse Loan is that the former favors the lender as it allows them to seize just about any asset of the borrower to recover their money. The non-recourse loan, on the other hand, favors the borrower by limiting the lenders’ access to only pledged collateral. Most lenders and credit unions use recourse debt as it is a safer option. Usually, the recourse terms are clearly mentioned in the agreement. This gives lenders and borrowers a clear picture of the rights and limitations of the borrower. Non-recourse loans are common in long-term loans.
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