Non-Recourse Debt

What Is Non-Recourse Debt?

Non-recourse debt is a type of loan secured by collateral, which is generally property. Assuming that the borrower defaults, the issuer can hold onto the collateral yet can't search out the borrower for any further compensation, even in the event that the collateral doesn't cover the full value of the defaulted amount. Here the borrower doesn't have personal liability for the loan.

Figuring out Non-Recourse Debt

Since much of the time the resale value of the collateral can dip below the loan balance throughout the loan, non-recourse debt is riskier to the lender than recourse debt.

Recourse debt permits the lender to pursue the borrower for any balance that remaining parts subsequent to liquidating the collateral. Hence, lenders charge higher interest rates on non-recourse debt to make up for the raised risk.

Recourse versus Non-recourse Debt

Recourse debt gives the creditor full autonomy to seek after the borrower for the total debt owed in the event of default. In the wake of liquidating the collateral, any balance that remains is known as a deficiency balance. The lender might endeavor to collect this balance by several means, including filing a claim and getting a deficiency judgment in court. In the event that the debt is non-recourse, the lender might liquidate the collateral yet may not endeavor to collect the deficiency balance.

With non-recourse debt, the creditor's just protection against borrower default is the ability to hold onto the collateral and liquidate it to cover the debt owed.

For instance, consider an auto lender who loans a customer $30,000 to purchase another vehicle. New cars are notorious for declining precipitously in value the moment they are driven off the part. At the point when the borrower stops making vehicle payments six months into the loan, the vehicle is just worth $22,000, yet the borrower actually owes $28,000.

The lender repossesses the vehicle and liquidates it for its full market value, leaving a deficiency balance of $6,000. Most vehicle loans are recourse loans, meaning the lender can seek after the borrower for the $6,000 deficiency balance. In the event it is a non-recourse loan, the lender forfeits this sum.

Special Considerations

Non-recourse debt is portrayed by high capital expenditures, long loan periods, and unsure revenue streams. Underwriting these loans requires financial modeling skills and sound information on the underlying technical domain. Lenders impose higher credit standards on borrowers to limit the chance of default. Non-recourse loans, on account of their greater risk, carry higher interest rates than recourse loans.

Highlights

• Loan-to-value ratios are generally limited to 60% in non-recourse loans.
• Non-recourse debt is described by high capital expenditures, long loan periods, and questionable revenue streams.
• Lenders charge higher interest rates on non-recourse debt to make up for the raised risk (i.e., the collateral's value dipping below the amount owed on the loan).
• Non-recourse debt is a type of loan that is secured by collateral, which is normally property.