Recourse vs. Non-Recourse Loan: What’s The Difference?

When you take out the loan, it will often be secured by an asset. This asset is regarded as collateral, and the banks will have the right to seize it and sell it to recover the money owed to them if you fail to meet the loan repayments.

However, there are two distinct types of landings within this framework – recourse and non-recourse. So, how do they work, and what is the difference.

What Is A Recourse Loan?

The assets typically secure a recourse loan. However, when the sale of these assets is not sufficient to cover the debt owed, the lender will have the privilege to seek the borrower’s additional assets or take legal action against them to recover their losses.

How Does It Work?

For instance, a borrower gets a loan of $15,000 and puts up $6000 car they own as collateral. If the borrower repays only $1500 of the loan and then defaults, the lending institution will have the right to seize the car and sell it, yet the lender’s right to go after the borrower would not end here. Assuming that the lender sells the car for $6000, $9000 still needs to be covered.

Two Cents: From the financing institutions perspective, the recourse loan is less risky, and so for this reason, you may get the benefit of low-interest rates and fees.

What Is A Non-Recourse Loan?

Non-recourse loans are less common for individual borrowers in Australia as they are typically offered to commercial borrowers. Therefore, finding a lender who will offer them may be far-fetched. On the other hand, recourse loans are a common type in Australia – all home loans are recourse loans because your new or existing property will be collateral against the loan.

About Limited-Recourse Loan

A limited-recourse loan is equivalent to a non-recourse borrowing. However, it has more specific and narrow rules about how and when to take it out.

As per the Australian Tax Office guidelines, a limited-recourse borrowing arrangement is when a self-managed super fund trustee lend the money from a third-party lender and utilise it to buy a single asset or collection of comparable assets with the same market value, which is retained in a different trust.

On such assets, the return on investments will go to the trustee, and if the loan defaults, the financing institution has the liberty to sell the assets held in the trust.

Our mortgage experts are always available for a no-obligation consultation. We can help you explore the best-suited home loan product so you can make the right decision based on your financial situation.
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