Non-Recourse Loan Agreements: What You Need to Know

A non-recourse loan is a type of loan that is secured by collateral. Unlike a recourse loan, where the borrower is held personally liable for any unpaid debt, a non-recourse loan limits the lender’s recourse to only the collateral securing the loan.

Non-recourse loan agreements can be beneficial to both borrowers and lenders. Borrowers are able to limit their personal risk in case of default, while lenders are able to mitigate their risk by only lending to those with sufficient collateral.

Here are some key things to keep in mind when considering a non-recourse loan agreement:

1. Collateral is key

The primary consideration for a non-recourse loan agreement is the value and quality of the collateral. The lender will typically only lend up to a certain percentage of the collateral value, so borrowers need to have sufficient assets to secure the loan.

2. Terms may be stricter

Since the lender’s only recourse is the collateral, they may require stricter terms and conditions for a non-recourse loan agreement compared to a recourse loan. This may include higher interest rates, shorter repayment periods, or more restrictive covenants.

3. Non-recourse does not mean risk-free

While non-recourse loans can limit personal liability for borrowers, they still carry some risk. If the value of the collateral falls below the outstanding loan balance, the borrower may still be responsible for any shortfall.

4. Non-recourse loans are not always available

Non-recourse loan agreements are typically only available for certain types of assets, such as real estate or equipment. Lenders may also require a higher credit score or stronger financial history for non-recourse loans.

In summary, non-recourse loan agreements can offer significant advantages to borrowers and lenders alike. However, careful consideration of the collateral, terms, and potential risks is essential before entering into such an agreement.