So first of all let’s see what a non-recourse loan means! Also called as non-recourse debt, in the simplest terms it is a secured loan contract, in which the collateral is the final repayment source. Therefore the lending company cannot call the borrower to account in case of his failure to pay his financial debts. So the good news is that in case of a default, you cannot be hold personally responsible for it. However, your creditor can sell the asset which serves as collateral. And lenders usually accept only a real property as collateral, so you have to be careful and well-informed before signing a non-recourse contract!

We shouldn’t avoid talking about the non-recourse loan’s riskiness from the point of view of the lender. Crediting companies offering such loans usually have high capital costs, inconstant or questionable revenue flows, and this is even more attended with risk as these products usually have long loan periods. Generally speaking, a creditor will attentively analyze your case before giving you a non-recourse loan. Nevertheless, you should make thorough analysis as well, which requires a severe knowledge regarding the underlying principles, rules, probability laws and financial models. So don’t regret spending your time with planning before taking out such a loan!

Moreover, due to their riskiness, non-recourse loans provide one with limited ratios most of the times, that is to say 80% - 90% loan to value in order to reduce the risks for creditors. This implies that the property used as collateral makes the loan ‘over-collateralized’, that is to say it comes with an exaggerated security. Interest rates may also be higher than with other loan types. However, non-recourse loan still stands on the borrower’s side, as lenders are obliged to make the loan contracts maintainable and wary both for themselves, but even more for borrowers. As a conclusion, lenders have much more chance to lose with these loans than borrowers.

But what are the advantages of taking out such a loan? First of all, if you’re default in paying your debt, your creditor cannot take possession of your non-pawned property or any other asset. So creditors’ recovery is confined within the limits of the collateral. This can be a real advantage for the borrower in case his or her debt is higher than the value of the collateral, as even if the pledged property is insufficient for covering the debts, the borrower is not obliged to pay for the outstanding balance. The case of a default usually happens when the market price of real estate products drop abruptly. In this case the collateral is not enough to repay the loan. Another good example would be if you default on your non-recourse car loan. The financial institution who gave you the loan can only foreclose on your car, without having the possibility to take further statutory action against you.

Another interesting benefit of Non-recourse loans is that they group traditional loans with the possibility to give the predefined collateral to the lender, and thus avoid paying off the original loan itself. Usually this is a good alternative for the borrower, but it’s a bad one for the lender. So if your unpaid loan is higher than the asset’s value which is used as collateral, giving the asset back to the lender is an extraordinary possibility. It is a similar case when the collateral’s value is uncertain and changeable. If the value of the asset becomes higher, you continue to pay back your loan. However, if it becomes depreciated, you can give it to your lender and thus don’t have any losses.

In case you are not sure if you have recourse or non-recourse loan, you are recommended to talk to an expert in order to see and be aware of your financial obligations. If you have the latter type, you are lucky, as a non-recourse debt makes it difficult for your lender to take legal proceedings in court. However, check the actual legislation as in some parts of the world the legal system allows creditors some kind of flexibility in their management of defaults.

Finally, let’s provide you with some essential advices related to non-recourse loans! First of all, you are strongly recommended to compare at least two-three different companies who offer such loans. Look at the interest rates, and the loan’s flexibility features. Check whether the contract’s terms and conditions can be changed over time. Furthermore, look over the different fees that apply if you take out a non-recourse loan. Investigate if there is any start-up, valuation or early-repayment charges, or any other hidden fees. Also examine what happens if you are late with one of your instalments: are there any late payment penalties?

All in all, non-recourse loan is a good alternative when one thinks about obtaining a secured loan. Keep in mind that your lender cannot take any legal action against you besides repossessing the collateral even if this compensation does not cover the total value that was lent for you. However, be careful when choosing between the various offers and take care particularly of the contract’s terms and conditions!