Recourse Loan (Recourse Debt)
The term recourse loan refers to a debt agreement whereby the lender can seek damages from the borrower in the event of default. With a recourse loan, the lender can take possession and sell the collateral, and has a claim to the other assets of the borrower.
Also referred to as recourse debt, a recourse loan is one that not only specifies the assets or property acting as collateral but also provides the lender with access to additional assets of the borrower in the event of default on the loan. With a recourse loan, the lender has a claim to additional assets of the borrower if the value of the asset used as collateral is insufficient to satisfy the debt owed.
Recourse loans can be further subdivided into the following two categories:
- Full Recourse Loans: provides the lender with the right to all the assets of the borrower, up to the full amount of the debt still owed.
- Limited Recourse Loans: also referred to as a partial recourse loan, allows the borrower access to specific (named) assets of the borrower.
Since recourse loans provide the lender with a claim to assets beyond those used as collateral, investors will realize a lower rate of interest on these loans when compared to nonrecourse debt, since access to additional assets reduces the risk associated with collateral that may decline over time.