When it comes to getting a loan, there’s more than one way to pay for it. Any loan that is secured by collateral is either a recourse loan or a non-recourse loan. Unsure what those are? In this blog, we discuss the basics of recourse vs non-recourse loans, how collateral works, and why you may prefer a non-recourse loan through Tribeca Lawsuit Loans when it comes to a personal injury, car accident, sexual harassment, or almost any other lawsuit.
What is Collateral?
First, it’s essential to understand the term collateral before addressing the difference between a recourse and a non-recourse loan. Collateral is an asset a lender accepts as security for a loan. If the borrower defaults on the loan, the lender can seize the collateral and sell it to pay off the loan.
In a car loan, the purchased car is the collateral for the loan. A mortgage has the house as the collateral for the debt. Even most credit card debt uses your cash assets as collateral. Typically, the collateral is essential to acquiring a secured loan. And, if you default on such a loan, meaning you stop making payments on the loan, your collateral will be repossessed and resold to repay the remaining balance on the loan.
However, when the collateral is re-sold, it often does not cover the outstanding balance on the loan. The amount of the loan that remains unpaid after the sale of your collateral is called the deficiency balance. What the lender can do to recover the deficiency balance on the loan is the difference between a recourse and a non-recourse loan.
Recourse vs. Non-Recourse Loan
Recourse is the legal right to collect money that is owed.
If you default on a recourse loan, the lender will seize the collateral, resell it, and use the proceeds to pay off the loan. If the funds from the sale leave a deficiency balance, the lender has recourse to collect the remaining money from you. You may be hounded by phone calls demanding repayment, your wages may be garnished, or a lien may be put on your home.
With a recourse loan, the borrower is 100% liable for the entire loan amount.
However, if you default on a non-recourse loan, the lender has no recourse to pursue repayment beyond taking and selling the collateral. If you fail to repay a non-recourse loan, you will not get endless calls demanding payment, your wages cannot be garnished, and there can be no lien on your house to repay the loan.
With a non-recourse loan, the lender has no right to seek loan repayment beyond the collateral.
Example of a Recourse Loan
Common types of recourse loans include car loans, credit cars, and home loans in most states. In 12 states, home loans are required to be non-recourse loans. The states are Alaska, Arizona, California, Connecticut, Idaho, Minnesota, North Carolina, North Dakota, Oregon, Texas, Utah, and Washington. If a homeowner defaults on the loan in one of these states, the house will be foreclosed and repossessed. But the lender cannot attach any other assets to repay the loan.
Let’s say you take out a $40,000 car loan to pay for a car that costs $50,000. The car is the collateral on the loan. You make payments, but you default on the loan after a few years with $30,000 debt remaining. The lender will repossess the car and resell it, applying the proceeds to the balance on the loan. But cars depreciate, and your vehicle only nets $20,000. The lender can get a court order allowing them to garnish your wages to collect the remaining $10,000.
Example of a Non-Recourse Loan
Most loans are recourse loans. However, lawsuit loans and home loans in the 12 states listed above are non-recourse loans, where the lender can repossess the collateral but cannot pursue repayment further.
Let’s say you were in a car accident that left you with several injuries. The other driver was at fault, so you sue for damages. You and your attorney fully expect to get $500,000 when the case finally settles, but it may take months or even years to settle, and you need money now. Rather than waiting for the settlement, you take out a $300,000 car accident lawsuit loan using your future settlement as collateral. But, somehow, the case is lost, and you get no money at all. In this case, the lender will not be repaid for the loan and has no recourse to come after you for money.
Nevertheless, it’s unlikely that your attorney and the lender’s underwriters would get it so wrong. So let’s say you win the case, but the settlement is just $200,000. In the case of a lawsuit loan, part of the settlement money is already claimed by your attorney’s contingency fees. The lender only receives the money left over in the settlement after your attorney’s fees are paid. Again, the lender cannot call you for repayment, send the loan to collections, garnish your wages, or put a lien on your home. The agreed-upon portion of your settlement is the sole source of money to repay the non-recourse loan.
Other Differences Between Recourse and Non-Recourse Loans
So far, we have discussed the fundamental differences between recourse and non-recourse loans. They differ primarily in what actions the lender can take against the borrower in the event of default. But these differences have effects that further distinguish recourse vs. nonrecourse loans. These effects include:
- Recourse loans are safer or less risky for lenders, while non-recourse loans are safer for borrowers.
- Because non-recourse loans are riskier for the lender, their interest rates are typically higher than recourse loans.
- Recourse loans require monthly payments that typically start right after the loan funds. In the case of a lawsuit loan, the collateral — the settlement — may not be finalized for months or even years. No payment is made until the settlement comes through.
Can a Non-Recourse Loan Become Recourse?
Some non-recourse loans have what is known as “bad boy carve-outs” that allow the lender to seek additional repayment in the case of fraudulent behavior on the borrower’s part. For example, large real estate deals often have such carve-outs that protect the lender from relying on false assertions made by the borrower. They may also require personal guarantees from the borrowers. Either case can allow the lender of a non-recourse loan to pursue further payment from the borrower. In essence, the non-recourse loan becomes a recourse loan.
However, in the case of legal lending like lawsuit loans, the loans are non-recourse, and they stay that way. The same goes for home loans in the 12 states that require them to be non-recourse loans.
What is a Lawsuit Loan?
Legal lending, also known as lawsuit loans, is a primary type of non-recourse loan. Essentially, a lawsuit loan acts as a cash advance on your future settlement.
Legal lending gives the plaintiff in a lawsuit the money they need to pay their bills while waiting for the best possible settlement their attorney can negotiate. Because lawsuits can take months or even years to complete, plaintiffs often face significant financial hardship as the negotiations drag out. In fact, that economic stress is something defense attorneys and insurance companies count on as they strive to get a better (smaller) settlement for their side by delaying the process. As the financial pressure mounts, many plaintiffs are forced to accept far less money than they deserve, simply to get some cash to stop the bleeding, rather than hold out for just compensation.
Legal lenders like Tribeca Lawsuit Loans help to level the playing field. By enabling plaintiffs to access the money from their future settlements, lawsuit loans empower them to fight for the complete compensation package their claims deserve. The ability to hold out for the best possible settlement can wind up netting plaintiffs more than double the initial settlement offers.
Why Do Legal Lenders Offer Non-Recourse Loans?
If legal lending is classified as a non-recourse loan, and if that is riskier for the lender than recourse loans, why do we do it? The IRS classifies legal lending as an investment. We think of our business as investing in democracy by improving plaintiffs’ access to justice.
We also work closely with your attorney, minimizing our risk by learning everything we can about your case. And, because we are invested in the successful outcome of your case, we may loan your attorney the funds needed to pay expensive litigation costs, like expert witnesses. We provide this funding to strengthen your case, improve your chances of winning a substantial settlement, and improve our chances of being repaid.
If you are the plaintiff in a personal injury lawsuit or a mass tort and need money to continue to fight for just compensation — we can help! Please visit our Appy Now page to start our quick application process that includes NO intrusive questions about your personal finances, credit history, or income. If you prefer to speak with a friendly and knowledgeable team member by phone, please call (866) 388-2288.
We can get you a risk-free non-recourse loan of $500 up to $2 million within 24-48 hours to help you achieve the best possible settlement for your case.