More than 30 million people get injured every year. That’s a startling number. What’s almost equally as surprising is that these injuries result in tens of thousands of lawsuits every year. In an ideal world, everyone who files a lawsuit because they were injured would have the means to live comfortably while their lawsuit slowly plodded along. That’s not realistic.
Of those tens of thousands of victims, many can’t work because of their injuries, or their livelihood is threatened in some other way. For many people, a pre-settlement loan is the only way to get relief. But have you ever heard someone say “don’t get a pre-settlement loan, those guys are loan sharks!”
Where does that opinion come from, and is it true?
In short, no. Nobody in legal financing will hire someone named Vito to come break your kneecaps if you lose your case and the funder loses its money (and if they did, you’d have a great lawsuit against them). Still, the perception that the rates charged for pre-settlement loans is high continues to exist. Why is that? Let’s look at a few reasons:
Apples to oranges comparison
Often times, critics of these financial lifelines feel the paybacks are expensive because they are comparing rates to those in completely unrelated industries. They look at a traditional bank loan, for instance, with its low monthly rate. That’s a totally unfair comparison. In a bank loan, you have to make payments every month, regardless of your current financial situation. If you lost your job, your bank loan still expects you to pay it back no matter what. That’s not true with non-recourse funding (see below). It’s like saying, “This Porsche is SO expensive! I mean, look at how much my friend paid for her Kia!” And speaking of non-recourse funding:
If you lose your case, the funder loses its money
Everyone that files a lawsuit thinks they’re going to win. Why would an attorney take the case otherwise? It’s not that simple. Sometimes cases look amazing on paper but get lost for any number of reasons. I once heard of a man who had a motor vehicle accident where he lost his eye. The police report clearly showed the driver was responsible and had plenty of insurance. The funder gave the man $50,000. In court it came out that the plaintiff had been in a bar fight the night before the auto accident and damaged his eye then. He lost the suit.
Even without fraud, cases can be lost for a number of reasons: a conservative venue, a bad expert witness, or simply a jury thinking the injuries weren’t very severe. Sometimes a case will be “won” by the plaintiff, but for so little money that there is nothing left over after the attorney and hospitals are paid off. No case is a guarantee.
No matter how good the underwriting is, no funding company wins them all. Because losses are part of the industry in ways that don’t apply to other industries, funders sometimes charge a little more to offset the losses.
There are many moving parts to getting a funding done
Some clients think that one person magically takes a case from start to finish and provides money to those in need. That’s wishful thinking. Most companies have different departments that handle different aspects: people to take the application, people to obtain case documents, attorneys to review the cases, and a financial department to release funds. That doesn’t even include upper management, HR departments to monitor all of these departments, and collection attorneys who handle any legal disputes. As someone who has hired an attorney, you know just how expensive attorneys can be. All of this adds up quickly.
Investors are still a little uncertain of the industry, and they charge more
The reality is most funding companies get the money they use to operate from outside investors, and the industry as a whole is only about 20 years old. An investor looking to fund a bank, for instance, has decades if not a century of statistics and profit-to-loss records to look at. The investor can see exactly how risky (or not risky) their investment is. In legal funding, the track records of companies needing capital are much smaller, making it appear riskier for the investor. As such, they charge more to lend the money. This increase unfortunately gets transferred to the client.
All this being said, the hype is, as it most often is, overblown. Rates can be higher than in other industries where the funder has more guarantees of receiving full repayment. In fact, rates can vary drastically even within the industry. Some companies charge more for certain types of cases that aren’t in their ‘wheelhouse’, while another company who specializes in those case types would charge less. A little research will go a long way in picking the right company.
At the beginning I asked What is the cost of peace of mind? For some folks who can’t work after their traumatic injury, and who may have to wait years to receive a settlement, it can be invaluable.