Non-recourse debt is a type of loan that is backed up by collateral. Often collaterals are properties. Now when the borrower could not meet up to. Obligations of the loan, the lender will have to seize the collateral. And thus, there is no debt of compensation from the borrower even though the. Collateral does not cover the loss. Nonetheless, the borrower does not have. Personal liability for the loan.
Many lenders prefer recourse debt to non-recourse debt. Because it is less risky. Thus, the value of the collateral can drop below. The loan balance while the loan is not yet repaid back in non-recourse debt.
WHAT YOU SHOULD KNOW
- On Non-recourse Debt, do you know that lenders charge. High-interest rates against the risk of the. Collateral going below the amount owed on the loan?
- This type of loan is secured by collateral, formally a property.
- Non-recourse debt is. Associated with streams of uncertain revenues, high capital expenditure, and long-lasting loans.
- Do you know that non-recourse loans. Are characterized by 60% loan-to-value ratios?
- Because recourse debt lenders can go after their. Remaining balance after liquidating the collateral, non-recourse debt. Lenders charge higher interest for elevated risks.
- The lender is in a position to seize the. Collateral if the borrower defaults to cover the debt.
COMPARISON – Non-recourse debt and recourse debt
Why is recourse debts better than non-recourses? Let’s see the review of their characteristics.
In Recourse debt, the creditor has full right to pursue the borrower for the total debt owed if they default the principal and obligations. Even after liquidating the collateral, the creditor goes after the balance known as the deficiency balance. The collection of the balance can be done in several means such as filing a lawsuit and obtaining a deficiency judgment in the court.
Non-recourse is characterized by high capital expenditures, long loan periods, and streams of uncertain revenue. Lenders charge high credit standards on borrowers to minimize their inability to meet the obligations. Thus, loan underwritings demand high modeling skills and sound knowledge of the underlying technical domain.
In summary, Non-recourse loans carry a higher risk than recourse loans.