Recourse Loan

Recourse Loan: What it Is and How It Works

A recourse loan is a secured loan that gives the lender the right to seize the pledged collateral and pursue the borrower’s other assets or income if the collateral’s sale doesn’t fully cover the unpaid debt. Lenders may also take legal action to collect any remaining balance.

Key takeaways

• Recourse loans allow lenders to recover unpaid balances by seizing collateral and, if necessary, other borrower assets or income.
• Contracts may specify whether the loan is full recourse (any assets) or limited recourse (only named assets).
• Common examples include many auto loans and hard-money real estate loans.
• Borrowers generally prefer non-recourse loans, which limit the lender to the collateral only; lenders favor recourse loans because they reduce credit risk.

How recourse loans work

1. The borrower pledges collateral (e.g., a car, property) to secure the loan.
2. If the borrower defaults, the lender repossesses and sells the collateral.
3. If sale proceeds don’t cover the outstanding balance, a recourse lender can pursue:
4. other assets (bank accounts, additional property),
5. income (wage garnishment, commissions, bonuses), or
6. legal remedies to obtain a deficiency judgment for the remaining balance.
7. The loan agreement typically details which remedies and assets are available to the lender (full vs. limited recourse).

Types of recourse arrangements

• Full recourse — lender may pursue any assets of the borrower.
• Limited recourse — lender may pursue only assets specified in the contract.
• Hard-money loans — often recourse; used in real estate, typically higher cost but easier approval.
• Auto loans — commonly recourse; lender can repossess and, if allowed, pursue remaining debt.

Recourse vs. non-recourse

• Recourse: lender can go beyond collateral to collect remaining debt.
• Non-recourse: lender’s recovery is limited to the collateral; any remaining deficiency is typically written off. Many purchase-money mortgages in certain states are treated as non-recourse under state law or practice.

Advantages and disadvantages

For borrowers
* Advantages:
* Easier to obtain financing if credit is limited (lenders accept higher risk).
* Disadvantages:
* Greater personal risk — other assets and income may be at stake.
* Often higher interest rates and fees compared with typical bank loans.

For lenders
* Advantages:
* Lower loss risk because they can pursue additional assets or income.
* Disadvantages:
* Potentially more legal and administrative costs to pursue deficiency balances.

Example

A borrower takes a $500,000 recourse mortgage. After foreclosure, the property sells for $400,000. The lender may seek the remaining $100,000 from the borrower’s other assets or obtain a deficiency judgment to collect the shortfall.

State limitations

Most U.S. states allow recourse and non-recourse loans, but 12 states impose restrictions that can protect borrowers from deficiency judgments in certain circumstances: Alaska, Arizona, California, Connecticut, Idaho, Minnesota, North Carolina, North Dakota, Oregon, Texas, Utah, and Washington. (Rules and applicability vary by loan type and state law.)

What assets can be seized?

Depending on contract terms and state law, a lender may be able to seize:
* The pledged collateral (vehicle, property)
* Bank deposits and investment accounts
* High-value personal property (vehicles, other real estate)
* Income through wage garnishment, commissions, bonuses, or certain retirement payments (subject to legal limits)

Practical tips for borrowers

• Read loan agreements carefully to understand recourse terms (full vs. limited).
• Negotiate non-recourse language where possible, especially for real estate investments.
• Consider the cost-benefit of higher-rate recourse loans (e.g., hard-money) versus alternative financing.
• Seek legal or financial advice if you’re uncertain about state-specific protections or contract implications.

Bottom line

Recourse loans expose borrowers to additional liability beyond the pledged collateral, making them riskier for the borrower but safer for the lender. Understanding the type of recourse, the specific contract language, and applicable state laws is essential before accepting such financing.