What is a nonrecourse loan?

A nonrecourse loan is characterized by the absence of personal liability on the part of the borrower. This means that if the borrower defaults on the loan, the lender's recovery is limited to the collateral specified in the loan agreement, typically the property itself. If the value of the collateral is insufficient to cover the outstanding loan balance, the lender cannot pursue the borrower's other assets or income. This feature makes nonrecourse loans particularly attractive to investors who seek to limit their personal financial risk.

In contrast, other types of loans may involve personal liability, requiring the borrower to be financially accountable beyond the collateral. A nonrecourse structure is often found in commercial real estate transactions or financing setups where the lender assesses the risk based on the asset's value rather than the individual's financial standing.