Recourse definition
/What is Recourse?
Recourse is the legal right of a lender to take over pledged collateral when a borrower is unable to pay back a loan . Recourse lending greatly reduces the risk for lenders, since it gives them a second source from which repayment can be made (besides the cash flows of the borrower). A full recourse lending arrangement leaves the borrower liable for the full amount of the underlying debt , which may be more than the amount that the lender obtains from sale of the associated collateral. In a non-recourse arrangement , the lender can only obtain satisfaction from the sale of the collateralized asset - the borrower is not liable for any additional amount. Larger borrowers are more likely to be able to force lenders to accept non-recourse lending arrangements.
Advantages of Recourse Lending
A lender prefers to use recourse lending, because it greatly reduces the lender’s risk of not being paid back. It is also advantageous for a borrower, which can usually negotiate a lower interest rate in exchange for providing collateral to offset a borrowing arrangement.
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Example of Recourse Lending
Altruist Corporation borrows $3 million from Currency Bank under a recourse lending arrangement, where the funds are to be used to acquire a production line. Two years later, Altruist defaults on the loan. Under the terms of the recourse arrangement, Currency Bank seizes the production line and sells it off for $800,000. Because this is a recourse loan, Currency can pursue Altruist for repayment of the remaining $2.2 million, since the collateral has now been used up.
