A recourse loan gives lenders legal rights to recover funds beyond the collateral if a borrower defaults. Unlike non-recourse loans, where the lender’s claim is limited to the secured asset, a recourse loan allows the lender to seek a deficiency judgment for any unpaid balance after collateral sale and pursue other personal assets such as savings, wages, or additional property.
For instance, in auto loans, if the car is repossessed and sold for less than the owed amount, the lender can demand the remaining balance. They may file a lawsuit to obtain a deficiency judgment, a legal order confirming the borrower’s debt, which enables the lender to garnish wages or seize other assets. This legal process strengthens lender security and can lead to lower interest rates or access to credit for borrowers.
Compared to non-recourse loans, which limit lender claims to the collateral (common in some commercial real estate loans), recourse loans carry higher borrower risk but reduce lender risk. States vary on mortgage recourse laws; some, like California, limit lender deficiency claims after foreclosure on primary residences, affecting borrower exposure.
Common examples of recourse loans include most personal loans, auto loans, credit cards, student loans, and many residential mortgages depending on state law. Small business loans often require personal guarantees, making them recourse loans as well.
Borrowers should carefully review loan terms to understand recourse implications. Managing repayment ability, maintaining an emergency fund, and knowing state-specific laws are essential strategies to mitigate risks. If uncertain, consulting a financial advisor or attorney can help clarify obligations.
For further guidance, see our articles on Deficiency Judgment and Loan Default.
Sources:
- Investopedia, “What Is a Recourse Loan?” https://www.investopedia.com/terms/r/recourseloan.asp
- Federal Student Aid, “Student Loans: Repayment” https://studentaid.gov/manage-loans/repayment
- Nolo.com, “Deficiency Judgments After Foreclosure in California” https://www.nolo.com/legal-encyclopedia/deficiency-judgments-after-foreclosure-california.html
