Nonrecourse Loan (Nonrecourse Debt)

Definition

The term nonrecourse loan refers to a debt agreement whereby the collateral securing the loan is the only source of repayment in the event of default. The lender can take possession and sell the collateral but has no right to the other assets of the borrower.

Explanation

Also referred to as nonrecourse debt, a nonrecourse loan is one that specifies the assets or property acting as collateral. The lender can seize this property and sell it if the borrower defaults on the loan, but the borrower is not responsible if the sales value is less than what is owed the lender. This feature makes nonrecourse debt riskier to the lender than other forms of debt that may provide the lender access to additional assets.

For this reason, nonrecourse debt is oftentimes limited to around a 50% loan-to-value ratio. That is to say, the asset serving as collateral for the loan will be worth roughly twice as much as the debt issued. This is referred to as an over-collateralized loan. Even with this protection, investors will demand a higher rate of interest on these loans than full recourse debt since there is a risk the value of the collateral may decline over time.

Related Terms

Primary Dealers Credit Facilityprimary creditsecondary creditprimary dealer, recourse loan