Non-Recourse Loan Definition & Example


DefinitionA non-recourse loan is a type of loan in which the lender gives up any recourse against the borrower that they may otherwise be entitled to in the event of loan default, and instead agrees to accept the collateral itself as their sole recourse.

...for contrast, consider the following examples of a "full recourse" loan versus a "non recourse" loan:

Full Recourse Loan Example:  Jim has a mortgage and fails to make payments, bringing the loan into default.  Jim's lender forecloses Jim's property, collecting $200,000 from the sale.  Unfortunately, the balance on Jim's loan was $250,000, leaving a remaining deficiency of $50,000.  Because Jim signed as a guarantor of the loan, the lender opts to enter a lawsuit against Jim to recoup the deficient $50,000.

Non Recourse Loan Example:  Jim has a mortgage and fails to make payments, bringing the loan into default.  Jim's lender forecloses Jim's property, collecting $200,000 from the sale.  Unfortunately, the balance on Jim's loan was $250,000, leaving a remaining deficiency of $50,000.  But nobody - including Jim - signed as a guarantor of the loan, so the loss is the lender's to absorb.

Because risk is shifted from the borrower to the lender in non-recourse loans, these loans tend to be more expensive and require higher down payments than full recourse loans.

Non-recourse loans are highly relevant for some self-directed IRA owners, a full recourse loans (if guaranteed by the account owner or any disqualified person) is a clear prohibited transaction.

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Bryan Ellis

Bryan Ellis is host of Self Directed Investor Talk, America's #1 podcast and for affluent self-directed investors. He's also an expert in self-directed IRA's, solo 401k's and 1031 exchanges. You can find Bryan's writing in very highly respected publications including Forbes, Entrepreneur and TheStreet. Bryan lives in metro Atlanta, Georgia with Carole Ellis - his wife, business partner and best friend - and his 4 children ranging in age from 2 to 19.