A recourse loan is a loan you can count on during the trial period. Most of the time, getting a loan in Ghana is challenging, regardless of its purpose. Many financial institutions that offer loans offer these procedures stress-free now. Ghanaian faces several challenges with a loan that involves collateral. Collateral becomes an obstacle to accessing loans once financial institutions involve it. However, because of their requirement of collateral, most lenders and financial institutions require vehicles or land. Therefore, those who can’t present it have a very hard time. However, with this loan, it’s more frustrating as a lender can go beyond the agreed collateral. But this happens for a reason or reasons. In this article, you will discover the reasons lenders go beyond the collateral. As we will discuss the meaning of a recourse loan. Also, comparing recourse loans and non-recourse loans.
What is a recourse loan?
They are loans that enable lenders to recoup their investment if a borrower cannot pay, and the asset of the underlying loan is not enough to cover the investment. They secured recourse loans forms of financing. A lender can take legal action if the debtor defaults. However, the lender collects all the debt, or recovers other assets that were not used as collateral for the loan.
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Key points to note about recourse loans
When considering getting a recourse loan, it is important to note:
- Defaulting on this loan allows the lender to take the collateral and any other assets that the borrower owns.
- In cases of this loan, a lender may seize deposit accounts and sources of income.
- Contracts for resource stipulate which assets are available to the lender.
- It usually makes up most hard money loans.
- Those who lend prefer it, while those who borrow prefer non-recourse loans. Collateral becomes the only asset the lender can seize.
Example of a recourse loan
Consider that a small tech repair business owner plans on expanding and no longer works from home. He purchases a property in which he can work with a ₵900,000 recourse loan. During the first year of his business, his debts cause it to falter. A decline in the market causes the property’s value to fall to only about ₵700,000. In order to recoup the additional ₵200,000 he owes, the lender can take action against his other property, such as his home and his bank account(s).
How do lenders recover their money?
If the borrower defaults on an unsecured loan, lenders may take action against their personal accounts, as well as their business accounts. In most cases, they can also go after someone’s income, such as garnishing their wages until they pay their debt. Also, apart from commissions and bonuses, lenders can take money directly from an individual’s pension and retirement plan.
Differences between recourse loans and non-recourse loans:
A non-recourse loan uses the asset as collateral only. In traditional mortgage loans, for example, there is no recourse to the lender. The home itself serves as collateral. Therefore, lenders can only seize the home if the borrower defaults on the loan. The lender cannot demand repayment from a borrower’s bank account or any other asset that the borrower owns.
Alternatively, you can consider hard money loans as recourse loan, even if they’re used to gain real estate.
Example of a non-recourse loan
Many traditional mortgages are non-recourse loans. The only collateral they can use is the home itself. When the borrower defaults on their mortgage loan, the bank takes possession of the house and sells it to sort the loan. Lenders, however, cannot take action against any remaining balance and must therefore take the loss.
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Meanwhile, a lender may offer this loan to borrowers, knowing that they likely cannot repay them. In order to gain possession of the property, lenders target borrowers who default on their loans. Basically, the lender is hoping to collect and sell the property for more than the original loan was worth, so they pursue this route.
Pros of a recourse loan over a non-recourse loan
An advantage of recourse is that they benefit the lender, whereas non-recourse loans benefit the borrower. However, the difference between recourse and non-recourse comes into play if the debt remains unpaid after they sell the collateral. Other benefits include:
- If the loan balance remains after collection of the collateral, lenders can pursue other assets owned by the borrower.
- Meanwhile, non-recourse lenders do not have permission to go after the borrower’s other assets. Even if a balance remains after they dispose of the collateral.
- Also, lenders who offer recourse have greater power since they have more assets at their disposal to claim for repayment.
- It reduces the lender’s perceived risk associated with borrowers who are less creditworthy.
What is the interest rate on a recourse loan?
It usually has a lower interest rate. This is because lenders can reduce the risk with it. However, banks and other financial institutions often make these loans when they tighten lending standards. Credit markets tighten as the economy grows uncertain, and lenders are less willing to lend to borrowers to compensate. The lack of access to credit during these times causes many borrowers to accept more restrictive terms, including destroying assets. Notwithstanding the interest rate.
Conclusion
A recourse makes the borrower liable for the entire amount; if the borrower defaults, the lender will pursue other means to recover the funds. Loans used to purchase real estate backed by hard money are usually recourse loans. When a borrower defaults on a loan, lenders can recoup their losses by seizing personal bank accounts and even their regular income. Therefore, always reconsider before going for a recourse loan.