Many people don’t realize that when taking out a loan, they have options because they can choose between a recourse and non-recourse loan.
With a recourse loan, lenders can pursue additional assets if you default when the balance of the debt is greater than the value of your collateral. Non-recourse loans permit the lender to seize the collateral specified in the terms of the loan agreement, regardless of whether or not its value covers the entire debt or not.
Both types of loans permit collateralization, meaning that the loan contract agreement will specify that the lender can take and sell the specified property to recoup losses in the event of a default. However, recourse debts give the lender the ability to pursue additional assets beyond that collateral value if necessary.
Continue reading to discover the differences between these two types of loans and which one may be best for you in your situation.
What Are Recourse Loans?
Recourse loans have a distinct advantage over non-recourse loans because they have a lower interest rate. However, if you fail to fulfill your obligation and default on the payment schedule, the lender has the right to take the collateral and sell it.
If selling the items specified as collateral in this recourse loan does not sufficiently cover the value of the loan amount, then the lender has the right to seize other assets. If you don’t have anything left to take, the lender can sue you to garnish your wages.
Lenders like recourse loans because they reduce their potential risk, especially with borrowers who don’t have the best credit history. This is precisely why you’ll see the interest rates so low on loans like these.
What Are Non-Recourse Loans?
Non-recourse loans leave lenders more vulnerable to losses. This is why you will be hard-pressed to find a bank that offers this type of loan. If you were to default on your loan and your collateral is insufficient, the lender takes the loss.
Non-recourse loans definitely benefit the borrower. However, the downside is that they have a much higher interest rate. You might be wondering who makes these types of loans if most banks don’t offer them. The most common place you’ll find non-recourse loans is through personal injury lawsuit loans.
Non-recourse loans are provided to front money to those who are strapped for cash while they wait for a personal injury settlement or trial to complete. You are not required to pay back this loan if your case doesn’t result in a win. This is why most pre-settlement funding lenders will analyze your case to see if it is strong before agreeing to provide the loan.
Which Loan Option Is the Right One for Your Needs?
As with anything, especially recourse and non-recourse loans, there are advantages and disadvantages. Ideally, you should compare them to find out which one fits your current needs.
If you have excellent credit and your personal finances are strong, a recourse loan will give you extra security if you run into difficult times later on. A non-recourse loan may be ideal if you need to protect your other assets while getting some money upfront, as in with a personal injury lawsuit loan.
Many people choose non-recourse loans when they have been injured by someone else’s negligence. This is because settlements and personal injury trials tend to take time to resolve, and as bills pile up, it’s a way to prevent financial disarray until the case is resolved.
You can visit https://pinnaclelegalfunding.com/personal-injury-lawsuit-loans/ to learn more about each kind of loan.
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