Recourse LoanCredit Repair Definition
A type of secured debt where the lender can seize collateral *and* pursue the borrower personally for deficiencies if the collateral sale is insufficient.
Definition
A recourse loan is a type of secured debt agreement where, if the borrower defaults and the sale of the collateral is not enough to cover the outstanding loan balance, the lender has the legal right (recourse) to pursue the borrower personally for the remaining deficiency balance. This means the lender can attempt to collect the shortfall from the borrower's other assets, income (through wage garnishment), or bank accounts after obtaining a deficiency judgment. Most standard consumer loans, including many auto loans and credit cards (though technically unsecured, collection functions similarly), and mortgages in many states, are recourse loans. This provides greater security for the lender compared to non-recourse loans, where the lender's only remedy is the collateral itself.
Frequently Asked Questions
What is the main risk of a recourse loan for the borrower?
The main risk is personal liability beyond the value of the collateral. If the borrower defaults and the collateral's value has decreased, they can still be legally obligated to pay the remaining difference, potentially leading to wage garnishment or seizure of other assets.
How does recourse debt differ from non-recourse debt?
With recourse debt, the lender can pursue the borrower personally for any deficiency after selling the collateral. With non-recourse debt, the lender's only remedy is to seize and sell the collateral; they cannot pursue the borrower personally for any shortfall.
Are most consumer loans recourse or non-recourse?
Most standard consumer loans (like auto loans, personal loans) are recourse loans. The status of mortgages varies significantly by state due to anti-deficiency laws; some states treat many mortgages as non-recourse, while others allow recourse.
Related Terms
Need Credit Help?
Discover tools and resources to help improve your credit score and financial health.