Moneyzine
Contents
/Personal Finance/Nonrecourse Loan (Nonrecourse Debt)

Nonrecourse Loan (Nonrecourse Debt)

Moneyzine Editor
Author: 
Moneyzine Editor
1 mins
September 25th, 2023
Advertiser Disclosure

Definition

The term nonrecourse loan refers to a debt agreement whereby the collateral securing the loan is the only source of repayment in the event of default. The lender can take possession and sell the collateral but has no right to the other assets of the borrower.

Explanation

Also referred to as nonrecourse debt, a nonrecourse loan is one that specifies the assets or property acting as collateral. The lender can seize this property and sell it if the borrower defaults on the loan, but the borrower is not responsible if the sales value is less than what is owed the lender. This feature makes nonrecourse debt riskier to the lender than other forms of debt that may provide the lender access to additional assets.

For this reason, nonrecourse debt is oftentimes limited to around a 50% loan-to-value ratio. That is to say, the asset serving as collateral for the loan will be worth roughly twice as much as the debt issued. This is referred to as an over-collateralized loan. Even with this protection, investors will demand a higher rate of interest on these loans than full recourse debt since there is a risk the value of the collateral may decline over time.

Related Terms

Related Content

  • What Can Help You Meet Your Budget While Shopping for Important Items?
    Budgeting while ensuring you don't compromise on quality can seem daunting. Whether filling your pantry, updating your wardrobe, or keeping up with the latest tech, smart shopping strategies are crucial for keeping your finances in check.
    April 2nd, 2024
  • How to Make a Million Dollars in 10 Years
    Truthfully, this title should actually be “How to Make a Million Dollars in 10 Years Without Going Into Debt", but that is just getting a little too winded for my liking. It’s true though!
    November 18th, 2024
  • How to Apply Maslow’s Hierarchy to Your Money This Year
    You might vaguely remember your psychology teacher talking about Maslow. He pointed at a picture of a triangle as you nodded off in the back of the school room.
    November 18th, 2024
  • How to Tackle Multiple Savings Goals
    When there’s only so much money to go around, there are often multiple savings goals competing for your money. Think of the young professional who’d like to get a more reliable car, buy a house, and save for retirement. Or consider the young family that’s saving for college, retirement, and a bigger house.
    March 22nd, 2024
  • The Countdown to Early Retirement: 10 Expenses to Eliminate
    Dreaming of waving goodbye to the daily grind five years ahead of schedule? The road to early retirement is paved with more than good intentions; it requires a meticulously crafted strategy with surprising twists. It's not solely about what you should be doing—like diligently saving a portion of your income or investing wisely—but also about what you need to stop doing.
    March 22nd, 2024

Contributors

Moneyzine Editor
The Moneyzine editorial team consists of writers and content specialists with diverse backgrounds.
Moneyzine 2024. All Rights Reserved.