Non-recourse Loans - how does this financing method work
Non recourse loans are loan types which are advantageous to the borrower but non advantageous for the lender. Simply put, if you take out a non recourse loan (secured with property), the lender agrees that if you will default on your payments, you will not be made legally responsible for any other payments than those resulted from the selling of your property.
For example, with the passing of time the market value of your property might fall. If you have taken out a loan of £100,000, and you defaulted on your loan after paying off only £10,000, the lender can ask for the secured collateral to be sold so that he can recuperate the losses. But the property is not valuing more than £70,000 momentarily, so this is all the lender can recover. It is a risk the lender has signed up for from the very beginning, and you cannot be pursued in any way for any further expenses.
This is how a non recourse loan financing works, however:
For example, with the passing of time the market value of your property might fall. If you have taken out a loan of £100,000, and you defaulted on your loan after paying off only £10,000, the lender can ask for the secured collateral to be sold so that he can recuperate the losses. But the property is not valuing more than £70,000 momentarily, so this is all the lender can recover. It is a risk the lender has signed up for from the very beginning, and you cannot be pursued in any way for any further expenses.
This is how a non recourse loan financing works, however:
- The lender takes some measures of protection for himself as well
- You will not be granted a non recourse loan, unless its value exceeds a certain level (£50,000 for example)
- Non recourse loans are typically not made available if you want to put as security a commercial residence, due to the high risk (market fluctuations, prices drop more drastically in case of commercial residence).
- The borrower must have an excellent credit rating. This is the most important criteria upon which you might be granted a non recourse loan. Bad credit rating is an immediate sign of risk for the lender, and non recourse loans are not intended for individuals with a bad credit profile.
Loans in general require a great attention when applying for them; especially if you are about to take out a secured loan and you put as collateral your home (or the equity in your home). It takes only a few missed payments, and the lender can easily require for the property to be sold so that he can recuperate his losses. So, before making such an option, the best thing to do is to turn to professional advice, because a money manager for example can see whether your present financial situation is stable enough in order to take out a loan which will have you make payments for years to come, or not.
