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Recourse Loan

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What Is A Recourse Loan?

A secured loan is known as a recourse loan. It allows the lender to pursue the debtor’s other assets that were not utilized as collateral for loans or to pursue legal measures in case of default to recover the full amount owed.

Deeper Definition

A recourse loan is a type of loan that is typically encountered in property investment and car loans. They offer lenders more control since there are fewer restrictions on the assets that may be used to repay loans. A recourse loan, in reality, empowers the lender to confiscate the collateral as well as the debtor’s other properties. In addition, the lender may take legal action against the borrower.

The creditor has the authority to confiscate funds from a debtor’s savings, checking, or other bank accounts. The creditor also provides the right to access the debtor’s revenue sources. Garnishing their paychecks is one option. 

Garnishment is a judicial process in which a creditor gets a court ruling directing the debtor’s employer to withdraw a specified sum from his/her wages to satisfy the debt. Wages, bonuses, incentives, and even income from a pension or retirement program might all be included in these profit margins. 

A recourse loan’s agreement and conditions often spell out the categories of assets that a lender can seize if a debtor fails to meet their financial commitments. A full-recourse loan, for example, empowers the creditor to pursue any property of the borrower. In this case, the creditor can only seek assets that are expressly listed in the contract in limited recourse loans.

Recourse Loan Example

Assume Lucas takes out a $20,000 loan to buy a $25,000 flat, with the amount guaranteed by the asset. If he fails on the loan after multiple payments and there is still $16,000 left on the loan, the creditor can take possession of the flat and sell it to reclaim the unpaid loan total. If the building has degraded to the point where it can only be sold for $12,000, the creditor can obtain a deficiency judgment from the court and then withhold his salary to recover the remaining $4,000.

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