Non-Recourse Loan
Key Highlights
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A non-recourse loan is a loan where the lender can only take the specific asset (like a property) tied to the loan if you can’t pay it back.
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They can’t go after your other money or belongings to cover any leftover debt.
What is Non-Recourse Loan?
A non-recourse loan is a loan where the lender can only take the specific asset (like a property) tied to the loan if you can’t pay it back. They can’t go after your other money or belongings to cover any leftover debt.
Key Features
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Limited Liability: The borrower is only responsible for repaying the loan up to the value of the collateral pledged. If the collateral’s value is insufficient to cover the outstanding loan balance, the lender absorbs the loss and cannot claim the borrower’s other assets.
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Backed by Assets: Non-recourse loans are supported by collateral—usually real estate or specific project assets—that the lender can claim if the borrower defaults.
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Higher Interest Rates: Since lenders take on more risk with non-recourse loans, they usually charge higher interest compared to recourse loans.
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Common Uses: Frequently used in commercial real estate, infrastructure, and project finance, where the project or property itself serves as the primary collateral.
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Stricter Approval: Lenders often require more stringent underwriting, strong collateral, and robust borrower credentials due to the higher risk.
Comparison with Recourse Loans
| Feature | Recourse Loan | Non-Recourse Loan |
|---|---|---|
| Lender’s Recovery | Collateral + other borrower assets | Collateral only |
| Borrower Liability | Personal liability for deficiency | No personal liability beyond collateral |
| Common Use | General lending, bank loans | Real estate, project finance |
Example
If a borrower defaults on a non-recourse mortgage and the property is worth less than the outstanding debt, the lender can foreclose on the property but cannot pursue the borrower for the remaining balance.