A lawsuit loan is a financial arrangement worth considering if you have sustained a personal injury due to a car accident, medical malpractice, product defect, or a slip and fall accident. Pre-settlement funding involves cash advances from lenders that you pay back after the funds for your settlement offer or court award are disbursed.
Lawsuit loans can help you make ends meet while you are waiting to receive a settlement offer or to gain a court award for your personal injury case. After all, your personal injury will probably lead to financial challenges, especially if your injury prevents you from working. Even if you have personal savings, you might run out of funds since you need to pay for your injury-related medical expenses and other regular bills.
A lawsuit settlement loan might seem like an attractive solution to your financial dilemma as an injured party. However, before you enter into an agreement with a lender, you need to be aware of the pros and cons of this kind of loan.
Continue reading to discover what a lawsuit loan is and how it works. Explore the advantages and disadvantages of a lawsuit loan. Learn about the cost of borrowing against your future lawsuit proceeds. Finally, find out why you should consult with a lawyer first before you decide to get a lawsuit settlement loan.
What Is a Lawsuit Loan?
A lawsuit loan is a type of personal injury loan which allows you to receive cash advances for your pending settlement offer or court award. You will be required to pay back the amount you borrowed once the funds from your settlement have been released. It is also commonly known as pre-settlement funding.
Lawsuit loans are usually provided by lawsuit funding companies, hedge fund businesses, banks, and private investors that loan money to plaintiffs. Your lender will charge you interest while the loan is still outstanding. The interest rates may vary depending on who your lender is and the details of your loan agreement.
Investopedia explains that the term “lawsuit settlement loan” is occasionally used to refer to advanced funding arrangements as well. This form of arrangement enables you to receive advanced funding from funding companies that provide cash in return for a certain portion of your settlement offer or court award.
Nevertheless, keep in mind that there is a distinction between a lawsuit loan and advanced funding in terms of their legal structure and the responsibilities of the borrower and lender. A lawsuit loan is a borrowing arrangement, while advanced funding is a purchasing agreement involving a specific fraction of your settlement offer or court award.
How Lawsuit Lending Works
Lawsuit lending is a course of action that you may be planning to take if you are a plaintiff expecting to receive a settlement offer or win a court award in a lawsuit. These are the steps you should follow if you decide to get a lawsuit loan:
- Step 1: Apply for a lawsuit settlement loan from a lawsuit funding company, bank, hedge fund company, or private investor after filing a personal injury lawsuit.
- Step 2: Wait for the company, bank, or investor to analyze your personal injury case. The organization or individual will assess your case based on the amount of cash you are likely to receive if you negotiate a settlement offer or win a court award after the trial.
- Step 3: The lender will offer you a cash advance amount based on the evaluation results of your case.
- Step 4: If you are satisfied with the loan amount, you will enter into an agreement with the lender to pay back a certain amount once you receive the proceeds of your settlement or award. This amount is usually composed of the principal amount plus the funding fee or interest.
- Step 5: As the borrower, you are required to pay back the lawsuit loan once the proceeds of your lawsuit judgment or settlement are disbursed and after your expenses are covered. Some of the expenses you may incur as you negotiate a settlement or pursue a lawsuit include litigation costs, lawyers’ fees, and medical expenses.
Advantages of Lawsuit Loans
Here are some of the benefits you can experience if you choose to get a lawsuit settlement loan:
1. Financial Provision
A lawsuit loan can help you make ends meet as you deal with the aftermath of the accident that led to your personal injury. An injury may lead to physical limitations and disabilities, which could cause you to stop working on a temporary or permanent basis. The loss of your ability to work may result in an avalanche of collection calls, late notices, and eviction notices.
Personal injury loans can provide you with financial assistance while you wait for your settlement offer or award so you can pay your bills in the meantime.
2. Conditional Payment
In some cases, pre-settlement funding requires you to repay your loan only if you receive a settlement offer or attain a court award, according to the National Law Review. Take note that conditional payment is only applicable to particular forms of lawsuit loans. You must confirm if it applies to your agreement with the lender before signing a contract.
3. Negotiating Power
You might be tempted to accept the initial settlement offer of the guilty party and insurance company even if the amount is not reasonable when you immediately need financial resources. A lawsuit loan may grant you negotiating power by increasing the time you can afford to negotiate with the other party. It can also provide you with the financial means to file a lawsuit.
Disadvantages of Lawsuit Loans
You need to be aware that lawsuit settlement loans may involve certain drawbacks. Here are some of the cons of a lawsuit loan:
1. High Interest Rates or Funding Fees
Lawsuit loans can be expensive because of the high interest rates or funding fees. The interest may balloon to astronomical costs because of the length of time it can take to negotiate a settlement offer or wait for a court award.
You must clarify the interest rates before you get a loan. Compute the potential amount based on the estimated amount of your future settlement or award. Be careful not to apply for a bigger loan than you actually need to minimize the final interest amount.
2. Strict Qualifications
Pre-settlement funding can be risky for a lender because it does not necessarily guarantee that the organization or investor will receive repayment for a lawsuit loan. You need to meet the lender’s qualifications so they can be assured there is a good chance you will negotiate an offer or win your case successfully. Since it is not easy to qualify for a lawsuit loan, you may need to apply to several lenders before your loan is approved.
3. Minimal Regulation
Lawsuit settlement loans have minimal regulations compared to other kinds of conventional loans. While certain states in the U.S. have implemented consumer safeguards, lawsuit loans are not regulated by the U.S. federal government.
The reasoning behind the limited regulations is based on lenders’ claims that lawsuit funding is not exactly a loan since lenders may not receive payment if the borrower fails to receive a settlement offer or court award. That’s why lenders insist that the typical laws on loans should not apply to pre-settlement funding.
The Cost of Borrowing Against Your Future Lawsuit Proceeds
Lawsuit loans’ interest rates or funding fees typically range from 2% to 4% every month. At first glance, it may seem like a low amount, but it can add up to an approximate annual rate of 27% to 60%. CNBC reports that the annual interest rates for unregulated lawsuit loans may even skyrocket up to 98% on cash advances.
While personal injury loans may be a convenient source of funds for injured parties, you should be aware that you may end up paying back twice or thrice the amount that you owe if your lawsuit lasts for several years.
Consult With a Lawyer Before Getting a Lawsuit Loan
A lawsuit loan can help tide you over if you are struggling with financial difficulties because of your personal injury. Nevertheless, it is a smart move for you to consult with a personal injury lawyer first before you decide to apply for pre-settlement funding.
The Law Office of John J. Perlstein can help you evaluate the terms of lawsuit settlement loans so you can ensure they are truly beneficial to you. We offer results-oriented, experienced legal representation in Los Angeles, Orange County, and other areas in Southern California.
Call us at (213) 252-1070 or send us a message to consult with a personal injury lawyer before you get a lawsuit loan.