If you’re planning to purchase a real estate property or even a car but don’t have enough resources to make a cash purchase, you can always take out a loan to make the purchase. There are secured loans, also known as recourse loans, and  unsecured loans or non recourse loans. When purchasing any retail asset, should you choose a retail non recourse loan, Or does a secured loan offer better advantages in the long term?

Choosing between non recourse loans and secured loans

In a recourse loan, the lenders normally have the upper hand since they are allowed to seize other personal assets should you default on your loan and the secured property proves insufficient to pay off the loan. This means bigger risk on your part, the borrower, compared to a non recourse loan. In a non recourse loan, you will get the financing you need without fear that the lender will hold you personally accountable for your debt. Since non-recourse financing typically requires  collateral, the purchased property serves as collateral for the loan. Non recourse lenders can only seize the collateral if you default on your loan. In case the value of the property as collateral is not enough to cover the loan, the lender will not be allowed to attach your personal assets or income.

Non recourse financing considerations

A non recourse loan is not completely without risk. Although this loan is considered low-risk on the part of the borrower, non-recourse loans should not be regarded as no-risk transactions. Some non-recourse lenders offer what is known as limited-recourse financing. This non-recourse loan comes with very specific conditions; and if these conditions are not met the lender will be allowed to go after your personal assets to fulfill the obligation. 

Non recourse loan rates also tend to be higher then secured loans, due to the higher risk nature, on the part of the lender.  The value of the collateral may fall or rise according to market conditions. In order to reduce that risk, lenders do not allow you to borrow the full amount on the property; generally only up to 80% to 90% loan to value amount may be borrowed.

Making the choice

If you choose non recourse financing therefore, it is important that you understand any conditions associated with the transaction and the additional costs, compared to regular secured loans. In applying for a retail loan, you always have a choice between secured loans or non-recourse loans. Nonetheless, non recourse financing in itself is already a broad concept, and not all types of non recourse loans are offered in the same terms or at the same rates. Choosing a good lender will help you make a better decision, based on your credit worthiness, existing properties for collateral, and finally your need for sufficient financing.