Limited recourse debt is a specific type of borrowing that allows a lender to claim certain but not all assets of a borrower in situations where they default on the loan. This type of debt falls between non-recourse debt, where only the collateral can be seized by the lender, and full recourse debt, which allows the lender to pursue all of the borrower's assets if the collateral does not cover the loan debt.
The term "recourse" in the lending context refers to the legal right of a lender to collect the debt owed by a borrower if they default. In a non-recourse loan, the lender can only claim the collateral used to secure the loan if the borrower defaults, but cannot chase other assets of the borrower. In contrast, a full recourse loan grants the lender the right to seize any assets of the borrower if the collateral does not fully cover the loan debt.
A limited recourse loan, however, offers a middle ground where the lender can seize the borrower's collateral, and a specific list of assets outlined in the loan agreement. However, any assets not explicitly listed in the agreement are safe from seizure and the borrower is not personally liable for any leftover debt.
From the perspective of a borrower, a limited recourse loan is more appealing than a full recourse loan as it provides a certain level of protection of their assets. Yet, it is less favorable than a non-recourse loan where only their collateral is at risk. On the flip side, lenders prefer full recourse loans as they provide greater assurance of debt recovery. To counterbalance the risk involved in limited recourse loans, lenders may charge higher interest rates.
Limited recourse loans are not common in consumer lending but are often seen in commercial lending, for instance, in large scale real estate projects. A property developer may seek a limited recourse loan to fund a new housing project, offering the development itself and other select assets as collateral while protecting other assets such as ongoing housing developments.
The concepts of secured and unsecured debt, foreclosure, repossession, and collateral are also integral to understanding different types of debts. Secured debt is backed by collateral, and non-payment can lead to foreclosure or repossession of the collateral. Unsecured debt does not involve any collateral. Examples of secured debt include auto loans and various types of recourse loans. Mortgages usually use the home itself as collateral.
Limited recourse debt can be beneficial to a borrower, especially if they seek to limit the risk to their assets. However, it is less attractive for lenders due to limited assurance of full debt recovery, which can result in higher costs to the borrower.