Nonrecourse loans
Nonrecourse loans are loans for which there is no recourse.
Loans can be classified into two categories:
- Recourse loans
- Non recourse loans
What is a recourse loan and what is a non recourse loan?
Recourse loans
Recourse loans are loans that are not backed by any collateral. If the borrower defaults on the loan, the lender has an option to either collect from the borrower and the assets of the borrower. The lender can also pursue legal action by right.
Non recourse loans
Nonrecourse loans are loans that use some sort of a collateral for security. However, the loan is nonrecouse, meaning that the borrower is not personally liable for this type of a loan.
If the borrower defaults, the lender can only seize the collateral. The lender bears a loss equal to the difference in the loan amount and value of the collateral.
Stock Loan: A Type of Nonrecourse loan
A loan against stocks or any publicly traded security is a nonrecourse loan. The lender
can only seize the securities if the borrower defaults on the loan.
Example: Nonrecourse Stock Loan
Consider an example of a nonrecourse stock loan. Jasmine owns shares worth $100,000 and she takes a loan of $80,000 against her shares. Her floor level is set to $70,000. She gets the loan
and the value of the stock continues to rise to $120,000. She is fine with her loan.
However, a sudden posting of a loss of earnings sinks the shares to a record low of $60,000. Jasmine is now below the set floor level for her loan. What does she do?
Loss to lender
Jasmine needs the money from the loan and cannot worry about her ownership of the stock. She chooses to walk away from her shares. She now has her $80,000 and lost ownership of her shares. On the other hand, the lender has the ownership of the shares. The lender is stuck with a loss of $10,000 from the loan to Jasmine.
No loss to lender
Jasmine has the money to bring her shares above the floor level. So she pays the lender the minimum amount needed to stay above her floor level. She now continues to have ownership of her shares and still has the loan.
To apply for a Stocks Loan, please complete the FREE Consultation for Stock Loans form.
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