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What Is a Non-Recourse Loan?

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  • Written By: Geri Terzo
  • Edited By: A. Joseph
  • Last Modified Date: 09 September 2016
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In the debt markets, there are different types of loans that can be obtained. A non-recourse loan is one that tends to favor the borrower. This is because in the event of a default on a loan, the lender has rights only to the assets that are considered collateral for the debt. If the loan is extended for project finance, which is corporate activity for a specific project, the only recourse that a lender has in the event of default includes assets tied to that endeavor. In the event that an individual defaults on a personal non-recourse loan, the lending institution typically is limited to recovering the assets that were used to secure the loan.

It's possible that an individual can obtain a non-recourse loan for a mortgage. In this type of financing, a borrower is issued a loan for the purpose of purchasing a new home. If the borrower eventually defaults on that loan, the lender is entitled to recover the home and property in a foreclosure but is limited to these assets. Even if the borrower who is in default has other savings or assets held elsewhere, the lender of the mortgage loan typically does not have the right to seize those items. Typically, a second mortgage that might be issued in a home refinancing is a recourse loan that gives the lenders greater rights if a default occurs.

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Project finance is a type of financing activity extended by financial institutions to businesses that are launching some capital-intensive project for which additional funding is needed. Borrowers might not qualify for more traditional forms of financing, and committing a portion of the project revenues to the lender before the cash is generated — which is typical in this type of non-recourse debt financing — might be the best option. If a project does not produce the anticipated revenues, however, the loan is secured by only the assets tied to the developing project.

Participants in the capital markets could use a non-recourse loan to help fund an acquisition of some sort. If a business is buying assets, such as real estate properties, it might have enough of its own cash to finance some of the deal. Funding for a percentage of the acquisition, however, might need to come from debt financing, and if the borrower qualifies, a non-recourse loan might be preferred. The precise terms of non-recourse debt can change based on the lender, and the borrower might be able to consider products from various lenders.

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