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The offers that appear on this site are from companies that compensate us. This compensation may impact how and where products appear on this site, including, for example, the order in which they may appear within the listing categories. But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you. SHARE: Gutesa/Shutterstock February 16, 2022 Zina Kumok has been a full-time personal finance writer since 2015. She’s a three-time nominee for Best Personal Finance Contributor/Freelancer at the Plutus Awards and a two-time speaker at FinCon, the premier financial media conference. Aylea Wilkins is an editor specializing in personal and home equity loans. She has previously worked for Bankrate editing content about auto, home and life insurance. She has been editing professionally for nearly a decade in a variety of fields with a primary focus on helping people make financial and purchasing decisions with confidence by providing clear and unbiased information. Bankrate logo The Bankrate promise
At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict editorial integrity, this post may contain references to products from our partners. Here's an explanation for how we make money. Bankrate logo The Bankrate promise
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next. Bankrate follows a strict , so you can trust that we’re putting your interests first. All of our content is authored by and edited by , who ensure everything we publish is objective, accurate and trustworthy. Our loans reporters and editors focus on the points consumers care about most — the different types of lending options, the best rates, the best lenders, how to pay off debt and more — so you can feel confident when investing your money. Bankrate logo Editorial integrity
Bankrate follows a strict , so you can trust that we’re putting your interests first. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. Key Principles
We value your trust. Our mission is to provide readers with accurate and unbiased information, and we have editorial standards in place to ensure that happens. Our editors and reporters thoroughly fact-check editorial content to ensure the information you’re reading is accurate. We maintain a firewall between our advertisers and our editorial team. Our editorial team does not receive direct compensation from our advertisers. Editorial Independence
Bankrate’s editorial team writes on behalf of YOU – the reader. Our goal is to give you the best advice to help you make smart personal finance decisions. We follow strict guidelines to ensure that our editorial content is not influenced by advertisers. Our editorial team receives no direct compensation from advertisers, and our content is thoroughly fact-checked to ensure accuracy. So, whether you’re reading an article or a review, you can trust that you’re getting credible and dependable information. Bankrate logo How we make money
You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. Bankrate follows a strict , so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. For lenders, minimizing risk is the name of the game. That’s why bigger loans have more stringent qualification requirements and why only the most reliable borrowers get the best interest rates. However, some lenders may go even further in reducing risk, offering what’s known as recourse loans. Recourse loans are loans that allow the lender to seize many of the borrower’s assets if the borrower fails to repay their loan—even assets that were not included in the loan agreement as collateral. With a nonrecourse loan, the lender may only seize those assets specified in the original loan agreement as collateral. Types of recourse loans
A recourse loan is when the lender is able to seize assets beyond the original collateral used to secure the loan. When you take out a loan, you agree to a contract that specifies what actions the lender can take if you default. Some common types of recourse loans include: Short-term real estate loans. Most are also recourse loans, but there are 12 states that allow nonrecourse mortgages. If a borrower defaults on a mortgage in one of those states, the lender will only be able to and not any other assets or sources of income. These states are: Alaska Arizona California Connecticut Hawaii Idaho Minnesota North Carolina North Dakota Texas Utah Washington All government-backed mortgages are nonrecourse loans, even if you don’t live in one of the 12 states listed above. If you default on a VA, USDA or FHA loan, the lender cannot come after any assets except for your home. An example of a recourse loan
Let’s say you take out an auto loan to buy a car. If you stop making payments, the lender can legally repossess the vehicle. The recourse aspect kicks in if the value of the vehicle is less than the remaining balance on the loan. For example, let’s say you took out a car loan and stopped making payments after one year, at which point the lender seizes the car. At this time, the car is only worth $12,000 — but you still have $14,000 left on the loan. The lender needs to recoup $2,000 to break even on the loan. If you have a recourse loan, the lender can then ask a court to garnish your wages until you’ve paid off the $2,000. It may also be able to recoup funds by taking your tax refunds, pension checks, Social Security checks and more. Recourse loan vs nonrecourse loan
In short, a recourse loan is when a lender can seize any asset, including and beyond the item used to secure the loan. By contrast, if you default on a nonrecourse loan, the lender can only take the asset associated with the loan. In other words, the lender may not go after any additional assets—even if the value of the asset associated with the loan does not cover the entire outstanding debt you owe. Because lenders face a potential loss with this type of loan, many do not offer them or reserve them for borrowers with the highest credit scores. Recourse loans are potentially more damaging to borrowers than nonrecourse loans, but they’re also more popular with lenders. If you’re currently carrying any form of debt, there’s a good chance that it’s a recourse loan. Should I get a recourse loan
Determining whether a recourse or nonrecourse loan will be best for you depends on your unique financial picture including your credit score and ability to maintain payments until the loan is fully repaid. Here are some examples of when a recourse and nonrecourse loan might be a good choice. Recourse loan: You have a high debt-to-income ratio: If you’re already making significant debt payments each month or have a high , a recourse loan will likely be a better choice. With a recourse loan, you will not risk collateral beyond that which is agreed to in the loan. You’re seeking a more competitive interest rate: Recourse loans almost always come with more favorable interest rates than nonrecourse loans because there is less risk for lenders in the event you are unable to repay the debt. Nonrecourse loan: You have an excellent credit score: Lenders typically have higher lending standards for nonrecourse loans and mostly offer them to borrowers who have the best credit scores. In addition, these loans may even require a larger down payment. You don’t mind paying higher interest: Because a nonrecourse loan limits a lender’s ability to recoup its money if you default, nonrecourse loans have much higher interest rates. The bottom line
If you already have a recourse loan, your best course of action is to pay your bills on time. If you’re worried about defaulting and have a recourse loan, you should call the lender and ask about your options. If you are deciding between a recourse loan and a nonrecourse loan, weigh the pros and cons. You may pay more interest on a nonrecourse loan, so if you have a stable job and low debt-to-income ratio, you may decide to take a small risk and choose a recourse loan. Learn more
SHARE: Zina Kumok has been a full-time personal finance writer since 2015. She’s a three-time nominee for Best Personal Finance Contributor/Freelancer at the Plutus Awards and a two-time speaker at FinCon, the premier financial media conference. Aylea Wilkins is an editor specializing in personal and home equity loans. She has previously worked for Bankrate editing content about auto, home and life insurance. She has been editing professionally for nearly a decade in a variety of fields with a primary focus on helping people make financial and purchasing decisions with confidence by providing clear and unbiased information. Related Articles