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What is a Recourse Loan?

Malcolm Tatum
By
Updated May 17, 2024
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Recourse loans are loans that are structured to allow lenders to continue to pursue recovery from a borrower in default, even after the collateral for the loan has been transferred to the lender. With a recourse loan, the lender may continue to settle any expenses that were created as part of the collection process, including fees for legal assistance. In the event that a third party functioned as a cosigner on the loan, the lender is also free to seek recovery from that party.

There is actually very little difference between a recourse loan and a non-recourse loan. Both loan types are written with competitive rates of interest, and both may require collateral as part of the contractual agreement. What is different is that a non-recourse loan does not include provisions for the lender to collect any assets from the borrower in the event of default, other than the asset that was pledged as collateral for the loan.

With a recourse loan, the lender is not limited to accepting the pledged collateral to settle a loan that is in default. If the value of the collateral is not enough to cover the outstanding balance of the loan, including applicable late charges, collection fees, and any other charges that have been added to the loan account, then the lender is free to file suit in order to secure any other assets owned by the borrower. For example, if the borrower defaulted on a mortgage that was written as a recourse loan, and the property had depreciated significantly since the loan was written, the lender may take legal action to garnish the borrower’s wages. Alternatively, the lender may go to court in an attempt to secure the right to claim any other assets that have a demonstrated cash value, such as other real estate owned by the borrower, jewelry, or even stocks and bonds.

It is important to note that different jurisdictions create laws and regulations that govern the issuance and enforcement of a recourse loan. For that reason, it is often a good idea to work with an attorney who is well-versed in local laws regarding loans and recovery on defaulted loans. In some jurisdictions, the borrower may have very little in the way of protection under the law. Other jurisdictions do place limits on the types of assets that a lender may attempt to secure through legal means, including assets that are considered necessary for the ongoing physical well-being of the borrower.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Malcolm Tatum
By Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including WiseGeek, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.
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Malcolm Tatum
Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
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