Recourse vs. Non-Recourse Loans – What’s the Difference?
If you’ve suffered an injury due to someone else’s negligence, you have the right to seek compensation via a lawsuit. Lawsuits can take considerable time to settle. This is true of any personal injury lawsuit – car accident lawsuits, medical malpractice lawsuits, slip and fall lawsuits – all of these different case types take time to run their course.
While you wait for your pending legal matter to settle, you will likely encounter unforeseen expenses that may put extra financial pressure on your everyday life. Medical bills, day-to-day expenses, lost wages – all of these expenses can start to add up.
If you need cash today to help offset these expenses while you wait for your lawsuit to settle, legal funding can be a viable option. Often referred to as a “lawsuit loan,” legal funding is an agreement that provides you with a cash advance on your future settlement.
Unlike a traditional loan, legal funding is a non-recourse form of lending where your future settlement acts as collateral. Understanding the difference between recourse and non-recourse loans is essential before you sign any legal funding agreement.
Collateral is the asset or property that is pledged by a borrower as security for the repayment of a loan. It serves to protect the interests of the lender who is making the loan. If a borrower defaults on a loan, a lender may seize the collateral that was provided in order to pay off the balance of the loan.
Recourse is the lender’s legal right to collect collateral that a borrower pledged if the borrower fails to repay the debt owed on time. A recourse loan gives the lender the ability to pursue other assets and income if the borrower fails to repay their debt obligation on time.
With a recourse loan, the borrower is completely liable for any outstanding balance. Based on the specifics of the loan agreement, the lender may repossess or foreclose on the loan collateral. If the lender is unable to secure the full balance of the loan by selling the collateral, the lender may be able to go after other assets belonging to the borrower. This can include levying bank accounts or garnishing wages. Common types of recourse loans include car loans, credit cards and short-term real estate loans. In most states, home mortgages are also considered recourse loans.
Non-recourse loans are a bit different. With non-recourse loans, the lender assumes greater risk. With a non-recourse loan, if a borrower defaults, the lender can still seize the loan collateral, but unlike a recourse loan, the lender won’t be able to pursue the borrower’s other assets. Because the lender assumes more risk with non-recourse loans, the interest rates for these types of loans are typically higher than what you would find with traditional, recourse loans.
Legal lending is essentially a non-recourse cash advance or “lawsuit loan” that uses your future settlement as collateral. Legal funding companies offer these lending options to plaintiffs as an investment. Because pre-settlement funding is non-recourse, a plaintiff is obligated to repay their cash advance only if their legal claim is successful. If a plaintiff’s case is ultimately not successful, the cash advance does not have to be repaid.
Understanding the difference between recourse and non-recourse loans is crucial before entering into a legal funding agreement. Always ensure that you fully understand the terms of the funding, and consult with your attorney to ensure it’s the right option for your situation.