Recourse Loans and Non-recourse Loans

Recourse loans are loans that allow the lender to come after you in case you default. You can contrast recourse loans with non-recourse loans, which create more risk for lenders. Let's take a look at recourse loans, how they work, and how to identify them.

Recourse Loans - The Recourse

Recourse loans get their name from the fact that lenders have power. They are allowed to go after you for amounts that you owe - even after they’ve taken collateral. If you default on a recourse loan, the lender can bring legal cases against you, garnish your wages, and try to collect the amount you owe.
A legal action to collect money after foreclosure is generally called a deficiency judgment.

• How Deficiency Judgments Work
• How Collateral Works

Non-Recourse Loans

A non-recourse loan does not allow the lender to pursue anything other than collateral. For example, if you default on your non-recourse home loan, the bank can only foreclose on the home. They generally cannot take further legal actions against you. The bank is out of luck even if the sale proceeds do not repay the loan.
Non-recourse loans create the most risk for lenders. Because they can only collect the collateral - and nothing else, they want to see lower loan to value ratios to reduce their risk. These loans may have higher interest rates than recourse loans.

Identifying Loan Types

You should consult your attorney or tax adviser be certain whether you have a recourse loan or a non-recourse loan. However, you can use the information below for discussion.
State laws often dictate whether a loan is a recourse loan or not. California is best known as a non-recourse loan state that makes it hard for lenders to sue. Some states give lenders flexibility in how they pursue defaults, but many lenders choose not to sue because defaulting borrowers often don’t have much to sue for.

• List of State Laws on Recourse Loans

Look up your state and see your state's rules on deficiency judgments. Refinances, second mortgages, and "cash out" transactions tend to create recourse loans.
Purchase loans for your primary residence are most likely non-recourse loans in non-recourse states.

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Family Loan

Borrowers sometimes find that a family loan is the best option. What does it take to set up a family loan properly? You have to consider financial and personal topics to make sure the loan does not become a nightmare.

What is a Family Loan?

A family loan is any loan between family members. It doesn’t matter what the money is for. It’s just a loan that does not use a bank or other traditional lender.

Financial Considerations

To properly design a family loan, the deal must make financial sense. It should be:

1. A good deal for the borrower
2. A good deal for the lender
3. Compliant with local laws and tax laws

If you start with the goal of a win/win situation, your family loan has a better shot at success.

Tax Laws

Forgiving loan balances or payments, and charging too little interest on a family loan can create problems. Make sure you consult with a tax expert to see if your loan follows all the rules. Lenders generally have to charge at least the Applicable Federal Rate (AFR), and follow other requirements.

Emotional Considerations

A family loan is more than a business transaction. Since you know the other party, you should be aware that personal issues make the deal more complicated. Relationships can end on a sour note, holidays can be awkward, and others (who were not part of the deal) can end up in a tough situation if a family loan goes bad.
To reduce the likelihood of problems, be open about everything. There’s no such thing as being too precise or clear about your objectives. Double check with your family members to ensure they see things the same way you do.
Some people say that these loans are always a bad idea. They suggest that you give the money to the family member, or find another way to help them indirectly. Consider all the possibilities before making a family loan.

• How Co-Signing Works

Another suggestion is that lenders should be prepared to lose money on the deal. If you’re not willing to risk kissing that money goodbye, a family loan is a bad idea unless you have collateral.

Documentation

The best way to do a family loan is with a formal document. Spell out the terms of the loan just like a bank would. If any collateral is used, be sure the document is sufficient to secure the lender’s interest (work with an attorney to make sure documents will work in your state).

• How Collateral Works

Good documentation keeps everybody on the same page. You can find sample documents online, purchase loan agreements specific to your needs, or pay a service provider to formalize your family loan for you.

Family Loan Services

If you want help with a family loan, there are several services that provide documentation, legal matters, and payments. These P2P lending sites may help with your family loan:

• Customizable loans: Virgin Money and their Family Mortgage program
• Student loans: GreenNote

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IRA Loan

When you need money, an IRA loan may come to mind. Technically, it’s not possible to borrow from your IRA. However, you can do a few things that act like an IRA loan for quick cash. Learn what your options are.

Is an IRA Loan Allowed?

No. IRS rules dictate what you can do with IRAs and only allow 'distributions' from an account.
If you want to review the rules governing your account, check with the IRS or a tax advisor about taking an IRA loan.

Alternatives to IRA Loans

Since you can’t do an IRA loan, you’ll have to try an alternative. You may be able to tap IRA assets using a 60 day rollover. You have to follow some strict IRS rules, but this technique can act like a short term IRA loan.
You might also be able to borrow against balances in company retirement plans such as 401(k) plans. Your plan must allow loans, and you’re taking a few risks (including defaulting on the loan resulting in taxes and penalties). Work with your HR department and tax advisor to understand this technique.

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Credit Union Loans

Credit union loans are among the most competitive loans available. How can you get one? You’ll need to become a member before you qualify for a credit union loan. Find out what it takes to get a credit union loan.

How Credit Unions Work

If you’ve never used a credit union, you may think they’re the same as banks. There are plenty of similarities, but credit unions are nonprofits owned by their customers. These characteristics often help credit union loan rates stay low.

• Fast Facts About Credit Unions

Credit union loans come in a variety of flavors, but small institutions might have fewer options:

1. Unsecured (Signature) loans
2. Home equity loans
3. Auto loans
4. Business loans
5. Student loans

Becoming a Member

Before applying for a credit union loan, you have to become a ‘member’. As long as you meet their criteria you’re in. You’ll often qualify by sharing characteristics with other members such as where you work or where you live.
If you need to find a credit union that will accept you, try the credit union search tool.

Applying

Contact the credit union and let them know you’re interested in borrowing money. Applying for membership is usually very quick and easy. Once you’re a member, you can apply for the loan.
Like bank loans, credit union loans usually require you to prove your creditworthiness. You’ll need to prove you can repay the loan or use a co-signer.

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Private Party Loans

Private party loans are loans between individuals. Instead of using a bank or finance company, you agree on loan terms and work together. Some private party loans are a great deal for all involved, with better terms than the bank offers. Sometimes, private party loans are the only option for borrowers with bad credit.

Uses of Private Party Loans

Where can you use a private party loan? Just about anywhere. The bank is always an option, but you should check out alternatives. Private party loans have been used for auto loans, but they’re also useful for home loans, personal loans, business funding, and more.
Sometimes private party loans create a win-win situation: great for lenders (who earn more than they can at the bank) and borrowers (who pay less interest than they would at the bank). When borrowers have poor credit, private party loans may be the only option available, although they may come with higher rates.

Where to Borrow

There are basically two ways to find private party loans: peer to peer lending services and people you know. To borrow from strangers, visit a peer to peer lending site and apply for a loan. Even if you set up a private party loan with somebody you know, these sites may help with loan documentation and servicing.

• How Peer to Peer Lending Works
• Family Loan - Good Idea?

Documentation

Documentation is a key to any private party loan. Make sure everything is spelled out in writing, and everybody understands and agrees. While it may seem overly formal, documentation can prevent headaches and heartbreaks in the future.
To document your private party loan, write an agreement or use somebody else’s. For larger loans, it’s probably best to use a professionally prepared agreement - a lot can go wrong, and good loan agreements anticipate pitfalls.
For private party loan documents, search the web, work with a local attorney, or use a peer to peer lending service. For example, Virgin Money sells agreements and even processes payments on mortgages and other private party loans.

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What are loan interest rates?

Loan interest rates are set by Prosper and are based on factors including:

1. Prosper Rating
2. Expected loss rate
3. Loan term
4. Economic environment
5. Competitive environment

Rates can change over time. The current interest rates are:

Prosper Rating	Term (yrs)	# Previous Prosper Loans	Borrower Rate	Borrower APR**
AA	1	1+	4.99%	5.93%
AA	3	1+	5.99%	6.33%
AA	5	1+	8.99%	9.20%
AA	1	0	4.99%	5.93%
AA	3	0	6.55%	6.89%
AA	5	0	9.55%	9.77%
A	1	1+	7.49%	13.25%
A	3	1+	8.49%	10.58%
A	5	1+	11.49%	12.83%
A	1	0	8.55%	14.33%
A	3	0	9.55%	11.65%
A	5	0	12.55%	13.91%
B	1	1+	11.49%	17.31%
B	3	1+	12.99%	15.13%
B	5	1+	15.99%	17.39%
B	1	0	12.99%	18.83%
B	3	0	14.49%	16.65%
B	5	0	17.49%	18.91%
C	3	1+	17.99%	21.34%
C	3	0	19.99%	23.38%
D	3	1+	24.99%	28.49%
D	3	0	26.99%	30.53%
E	3	-	31.99%	35.64%
HR*	n/a	n/a	n/a	n/a

 HR listings are currently not offered

For example, if you take out a loan for $5,000 for three years and you have a Prosper Rating of B and one or more previous Prosper loans, your APR will be 15.13% and your scheduled monthly payment will be $168.45

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