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Highlights
- A nonrecourse loan limits the lender’s claim to only the collateralized asset.
- Borrowers are not personally liable for repayment beyond the secured property.
- Common in real estate and partnership financing to reduce personal financial risk.
A nonrecourse loan is a type of financing agreement in which the borrower is not personally liable for repayment beyond the specific collateral securing the loan. If the borrower defaults, the lender's only remedy is to seize and sell the collateral—typically real estate or other tangible assets. The lender has no further legal claim on the borrower’s other assets or income.
This structure is particularly beneficial in partnerships or investment arrangements where individual partners do not want to bear personal risk. In the case of a partnership that defaults on a nonrecourse loan, the lender cannot pursue any of the partners for the unpaid balance if the collateral fails to cover the debt. The only action available to the lender is foreclosure on the pledged asset.
Nonrecourse loans are commonly used in large-scale real estate transactions, project finance, and investment structures, offering protection to investors and partners by limiting their exposure. However, because the lender assumes more risk, these loans often come with stricter terms, higher interest rates, or require more valuable collateral.
Conclusion
Nonrecourse loans provide a safeguard for borrowers and investors by capping liability at the value of the collateral, making them an attractive financing tool for those seeking to limit personal financial risk.
