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There are two types of debt: Recourse and NonRecourse

Recourse means the borrower is personally liable for the entire debt amount, even if the collateral securing the loan is worth less than the loan amount.

A nonrecourse loan means that the borrower is NOT personally liable, so the bank’s only security is the collateral itself.

The recourse vs. nonrecourse provision really only matters in cases of foreclosure, when the lender is forced to take possession of the property and sell it to recover the amount they are owed. If the lender sells the property, but still hasn’t recovered all of the money it is owed, then the remaining amount is called a deficiency.

If the loan is a recourse loan, then the lender can sue the borrower who personally guaranteed the loan and go after their other assets in order to recover the deficiency.

If the loan is nonrecourse, then the borrower cannot be sued for the deficiency, and the lender must take a loss on that amount.

Recourse loans reduce the risk for the lender, while nonrecourse loans reduce the risk for the borrower.

Most loans are recourse loans, especially auto loans, credit cards and home mortgages in most states, but not all. But sometimes

Nonrecourse loans typically have higher interest rates and more restrictive borrower qualifications than recourse loans because nonrecourse debt is riskier for lenders.

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