Settlement funding goes by many names, including pre-settlement funding, lawsuit loans, legal cash advances, and litigation financing.
This form of risk free financing allows plaintiffs to leverage a portion of their expected personal injury settlement or award in the form of a cash advance.
Many victims of product liability claims, car accident injuries, or medical malpractice claims, find that pre-settlement funding helps keep financial stress at bay. Today’s guide will help you determine whether a lawsuit loan is the right solution for you.
What Is Settlement Financing?
Settlement financing helps you access your settlement money early by way of a cash advance from a legal funding company. If you receive a settlement, you will pay back the amount borrowed plus interest and an origination fee, but you repay nothing if your case does not settle.
This type of non-recourse financing involves no risk for you as a consumer. The cash advance is not repayable if your case does not settle. Despite being commonly referred to as a lawsuit loan, legal funding is not a traditional loan – more on this below.
For some people, lawsuit loans are a convenient way of getting part of their settlement early. Pre-settlement funding is not always the most cost-effective of borrowing in all cases, though. Today’s beginner’s guide to settlement financing will clear up all aspects of the legal funding process.
Who Might Need Settlement Financing?
Many types of personal injury claims take months to settle. It can take years for a case to settle if you need to go to trial.
Car accident, medical malpractice, and product liability claims all take time to settle.
If you sustain injuries in a car crash, for example, you may be unable to work while recovering and rehabilitating. In addition to lost wages, you may also face extra medical expenses, from prescription medications and physical therapy through to surgery and post-surgery rehabilitation.
The flexible nature of settlement financing means you can meet routine and unexpected expenses by taking advantage of some of your settlement money in advance.
As well as the claims listed above, heirs waiting for estates to settle, and victims of civil rights suits often find pre-settlement financing helps defray costs and alleviate financial stressors.
Some plaintiffs do not have an emergency fund or savings fund to draw on. Others do not qualify for traditional bank loans. In many cases, friends and family may be unable to help, leaving legal funding as a practical and user-friendly route to getting a cash advance on the strength of an anticipated personal injury settlement.
If you are considering this form of non-recourse financing to help you meet pressing costs, the more you learn about the process, the more readily you can determine if settlement funding makes financial sense for you.
How Does Settlement Funding Work?
Once you have researched suitable legal funding companies near you, you can apply quickly and easily, either on the phone or by completing a straightforward online application.
In the first instance, you need only provide the funding company with the facts of your case and your attorney’s contact details.
The lending company then reviews your case, consulting with your lawyer to calculate the expected settlement amount. If the lending company accepts your application, you can borrow from 10% to 20% of your anticipated settlement amount in the form of a cash advance.
If you meet the lender’s criteria – that is, you have legal representation and a strong case – the lender will send a funding agreement to your attorney. Once you sign and return this contract to the legal funding company, you should get your cash advance in 24 to 48 hours.
If you win your case, you repay the following:
- Principal amount borrowed
- Interest on principal
- Origination fee
Avoid any lawsuit loan companies demanding money upfront. Do not look unfavorably on the origination fee either. Sometimes called a funding fee, you do not pay out-of-pocket for this fee but rather from your final settlement when you repay the lawsuit loan. Many companies who offer legal funding with low or no funding fees charge high rates of compounding interest, potentially costing you much more.
If you fail to win your case, you are not legally obliged to repay the cash advance due to the non-recourse nature of the product. As such, lenders will only offer legal funding to clients represented by attorneys with a strong personal injury case.
Often, you may need to approach several legal funding companies before finding the best fit for your financial needs.
How Does Settlement Financing Differ from a Bank Loan?
Unlike a traditional bank loan, a lawsuit loan is considered a non-recourse financial product. What does this mean for you, the consumer?
With a traditional loan, you borrow money and are legally obliged to repay that money, regardless of circumstances. With a lawsuit loan, you only repay the cash advance if your case settles and you receive compensation as expected.
If you take a regular bank loan, you will need to make monthly payments. With settlement financing, by contrast, you repay the cash advance plus all associated costs in full from your final settlement amount. Your attorney will repay the lender before sending you the balance of your settlement, after all other deductions like legal fees and medical liens.
Unlike traditional bank loans, legal funding does not impact consumer credit ratings. Creditworthiness is not a qualifying factor. You will not have to prove your income or your employment status either when applying for a lawsuit loan.
The other key difference between settlement financing and a standard bank loan is the fact that settlement financing is not covered by state usury laws. These laws limit high interest rates, so keep an eye out for any legal funding company charging high rates of compounding interest or you could repay two or three times the amount you borrow if your case takes time to settle.
What costs are associated with legal funding, then?
What Does Settlement Financing Cost?
All reputable settlement financing companies should be transparent about the costs involved when borrowing against a personal injury lawsuit.
As well as repaying the principal amount borrowed, you will also agree to pay interest and any origination fee agreed upon.
Many legal funding companies promise low funding fees or no funding fees, but charge high rates of interest that compounds monthly. Others charge more robust origination fees, but lower rates of non-compounding interest, also known as simple interest. Given the timeframe of most personal injury claims, this can work out a more cost-effective way of borrowing.
When you receive your settlement or award from a personal injury claim, the insurer will send the check to the law offices of your attorney. Your lawyer pays the check into a trust or escrow account. Once the check is cleared by the issuing bank, your attorney will make the following deductions:
- Attorney’s fees
- Litigation costs
- Medical liens
- Settlement financing
You will then receive the remainder of your settlement
What If Your Case Settles for Less than Expected?
If your case settles for less than expected, you will never need to repay more than the value of your settlement, however much you borrowed by way of settlement financing.
Similarly, if you do not win your case, you repay nothing.
The lender shoulders all the risk in a non-recourse financial transaction, passed on to you by way of the relatively high costs associated with this form of borrowing.
What Are the Advantages and Disadvantages of Settlement Financing?
Settlement financing has its own benefits and drawbacks, making it the ideal tide-over measure for some people and completely unsuitable for others.
Advantages of Settlement Financing
● Settlement funding can serve as a financial bridge: Many plaintiffs losing income while faced with mortgage payments, living expenses, medical bills, prescription medication costs, and tuition fees find settlement financing is an efficient tide-over measure with no risk attached.
● Lawsuit loans can buy you time for negotiation: If you are being pressured by an insurance claims adjuster to accept an unreasonably low settlement offer, a lawsuit loan can buy you the time needed for your attorney to present a counteroffer and negotiate a superior settlement. If negotiation is fruitless, you may need to file a personal injury lawsuit, again taking time and money. Settlement financing can often provide the breathing space required to pursue the compensation you deserve.
Disadvantages of Settlement Financing
● Not all cases qualify for settlement financing: Due to the risk lenders assume when offering cash advances against anticipated lawsuits and settlements, they will not accept all applications. To qualify for settlement financing, you will need an attorney representing your case. The lender must also be confident you will win your case.
● Settlement financing can be costly: Some funding companies charge interest on lawsuit loans that compounds monthly. Many try to camouflage this by charging low funding fees. If your case takes some time to settle, choosing the wrong lawsuit loan could prove an expensive mistake.
Does Government Regulation Protect You if You Take Settlement Financing?
Laws governing consumer credit work in the following ways:
● By controlling how lenders disclose the terms of loans.
● By limiting the rates of interest lenders can charge.
Since lawsuit loans are non-recourse by nature, this means laws governing interest rates do not apply.
In some states, lenders must disclose the following information:
- How the interest rate is calculated.
- Total interest payable over the lifetime of the lawsuit loan.
- Any late penalty fees.
- All other associated fees.
Is Settlement Financing the Only Solution?
Settlement financing can be an effective way of relieving financial stress while waiting for a personal injury settlement, but it doesn’t make the smoothest fit for everyone.
If you have an emergency fund, consider using funds from this and replenishing them from your settlement.
Friends and family might be able to help with no-interest or low-interest loans, depending on your circumstances.
You could consider a traditional bank loan, assuming your credit score, income, and employment status make this possible.
Only you can decide whether settlement funding is the right choice in your circumstances.
Get Settlement Financing from Uplift Legal Funding
Here at Uplift Legal Funding, we ensure that the settlement financing process is seamless and straightforward.
Call us toll-free at (800) 385-3660 or apply online. Once you provide us with your attorney’s contact details and the basic facts of your case, we can liaise with your legal counsel, potentially furnishing you with a cash advance offer within 24 hours.
If you need cash now in exchange for a portion of your future personal injury statement, make it happen today.