Limited Recourse Debt Definition
A limited recourse debt refers to a debt which a lender has limited claims on if the borrower happens to default. In case the borrower defaults, the lender can still claim but with respect to the collateral. In other words, the recovery by the lender is limited to the collateral.
This type of debt is protected by a security interest in collateral, making it impossible for a creditor to put claims on it. So, the borrower will not be personally liable for any loss that happens between the debt’s amount and the collateral amount. Another term for limited recourse is partial recourse debt.
A Little More on What is Limited Recourse Debt
Recourse debt refers to debt that has collateral from the borrower. It is for securing the loan a borrower has taken. It acts as loan security whereby, in the event that default occurs, the lender can sell the assets agreed on in the contract to recover the loan. With limited recourse debt, if the collateral agreed on is not enough to recover the unpaid loan, the lender cannot claim any other asset that a borrower has.
Limited recourse debt is a loan secured up to a certain amount. For instance, if a loan with 40% of the principal is secured, it becomes a limited recourse loan. A limited recourse falls between a secured loan and unsecured loan. Such loans carry lower interest rates compared to those without recourse loans. Limited recourse assets are paid before unsecured debt and after secured debt, in case of liquidation.
Limited Recourse vs. Full Limited Recourse
There are two forms of recourse debt; limited and full. With full recourse debt, a granter has the right to seize any or the entire borrower’s assets to pay up the debts in full. The lender can seize assets, including those that a borrower acquired using the original loan.
On the other hand, limited recourse debt sticks to the original loan contract. In other words, a lender can only seize those assets mentioned on the contract and nothing else. The lender has no right to seize any other asset a borrower possesses, especially if it was not part of the collateral.