Non-Recourse Debt: Definition, Comparison, and Examples

Non-recourse debt is a loan secured by specific collateral—commonly property—where the lender’s recovery in the event of borrower default is limited to the collateral itself. The lender cannot pursue the borrower’s other assets or income to make up any shortfall after the collateral is seized and sold.

Key takeaways

• Non-recourse loans limit lender recovery to the pledged collateral; borrowers are not personally liable beyond that collateral.
• Lenders charge higher interest rates and apply stricter underwriting because they bear greater loss risk.
• These loans are often used where projects involve high capital expenditures, long terms, or uncertain revenue streams.
• Recourse loans allow lenders to seek deficiency balances from borrowers after selling collateral, often via deficiency judgments.
• Whether a loan is recourse or non-recourse can depend on contract terms and state law.

How non-recourse debt works

With a non-recourse loan, the lender’s remedy for default is to seize and liquidate the collateral. If the sale proceeds are less than the outstanding loan balance, the lender absorbs the loss rather than pursuing the borrower for the deficiency. Because of this limited recovery, lenders protect themselves through higher interest rates, larger down payments, or stricter credit and loan-to-value requirements.

Recourse vs. non-recourse: the difference

• Recourse debt: After collateral is sold, any remaining balance (the deficiency) becomes the borrower’s personal obligation. Lenders can pursue that deficiency through lawsuits and obtain deficiency judgments, which may lead to wage garnishment or levies on bank accounts.
• Non-recourse debt: Lenders accept the collateral as full security. They generally cannot pursue the borrower’s other assets for any shortfall after foreclosure or repossession.

Example

A borrower takes a $30,000 auto loan. After one year the car’s value falls to $22,000 while the loan balance is $26,000. If the borrower defaults:
* Recourse loan — the lender can repossess and sell the car, then pursue the borrower for the $4,000 deficiency.
* Non-recourse loan — the lender repossesses and sells the car, but cannot seek the remaining $4,000 from the borrower; the lender absorbs the loss.

When loans are non-recourse

The classification can depend on the loan agreement and state law. Some states restrict lenders’ ability to obtain deficiency judgments on certain types of loans (for example, some residential mortgages), effectively making them non-recourse under specific circumstances. Lenders may also voluntarily offer non-recourse terms for certain commercial or project financing arrangements.

Who can qualify

Because non-recourse loans increase lender risk, qualifying borrowers typically face stricter criteria:
* Strong credit profiles
* Lower loan-to-value ratios
* Larger down payments or equity contributions
Lenders may offset risk with higher interest rates or additional covenants.

How recourse liabilities are collected

If a loan is recourse and collateral sale leaves a deficiency, lenders may pursue collection by:
* Filing suit and obtaining a deficiency judgment
* Garnishing wages
* Levying bank accounts or other assets, subject to legal limits

Bottom line

Non-recourse debt offers borrowers protection from personal liability beyond the pledged collateral, but it comes at a cost: tighter underwriting, higher rates, and often higher equity requirements. Whether a loan is recourse or non-recourse matters for both borrowers and lenders and can hinge on contract language and applicable state laws. Understanding these differences helps borrowers choose appropriate financing and anticipate the consequences of default.