If you are injured in an automobile accident, you will likely need time off work while also being faced with unexpected medical bills.
Perhaps you were forced to sue for medical malpractice and you are waiting for the settlement to resolve.
Whatever your reasons for filing suit, you might find yourself in financial hardship while waiting for your compensation to arrive.
A lawsuit loan, also known as a lawsuit cash advance, settlement funding, or pre-settlement funding, can tide you over until you receive a future settlement award or judgment. Lawsuit loans are not the right solution for everyone though, and this guide will help you decide if legal funding makes sense for you.
Who Should Consider a Lawsuit Settlement Loan?
With settlement funding, you get money now in exchange for a portion of your expected settlement award plus interest. This can be invaluable if you find your personal injury claim dragging on while bills continue to pile up.
If you find yourself struggling to meet daily expenses, medical bills, or mortgage payments, pre-settlement funding can help you to plug the gap until your settlement arrives.
You should consider this form of financing as a last resort rather than your first option. We’ll highlight some of your alternatives to lawsuit loans below.
Why Take a Lawsuit Cash Advance?
While lawsuit loans do not make the best bet for everyone, this form of financing has several key benefits, especially for plaintiffs in financial hardship.
The primary advantage of lawsuit loans is getting cash quickly so you can keep food on the table, utilities functioning, and the roof over your head. This allows you to focus on recovering from your injuries and getting back to work rather than worrying about finances.
Taking a lawsuit loan can also buy you some precious breathing space. Many insurance companies pressurize accident injury victims into settling for unfairly low amounts, capitalizing on the fact they are under financial duress and looking for a quickfire solution. They may drag out the settlement process hoping the plaintiff will cave in to lowball demands.
The other principal advantage of lawsuit loans is the non-recourse nature of this borrowing. If you do not win your case or get a court award, you repay nothing.
How Do Lawsuit Loans Work?
You apply for a lawsuit loan with a legal funding company. The lender reviews your case and evaluates the amount of a likely settlement. The lender will then agree to offer you a cash advance in return for a portion of your settlement or personal injury award.
The level of risk shouldered by the lender means they will not accept all applications. They will only offer you a cash advance if you are represented by an attorney and they strongly believe you will win your case or reach a settlement.
You repay the principal plus a funding fee and interest if you win your case. If you do not receive a settlement, you repay nothing.
If you feel this form of financing would help you stay on track while you wait for your settlement, you may need to apply to several legal funding companies before finding one prepared to advance you cash on the strength of a potential personal injury settlement.
While lawsuit loans have these benefits, they also come with a significant downside.
The Drawbacks of Lawsuit Loans
The drawbacks of settlement funding are explained by the high level of risk the lender takes. When cases fail to settle, the company fails to recoup their investment.
Even if you end up winning less than you expected, you might not need to repay the full amount you borrowed, again costing the lender.
Lenders, then, need to be picky when deciding which cases to advance money against, and this means you are not guaranteed to be accepted by the first legal funding company you approach.
If your case is strong and you have retained a personal injury lawyer, you should find a lawsuit lender prepared to offer you a cash advance. While there is no credit check and no need to prove income, the high interest rates compound monthly, often snowballing when cases drag on. Lawsuit loans often also include additional fees.
Interest rates for lawsuit loans are typically in the range of 2% to 4% monthly. This interest compounds monthly, though, so you could face annual interest rates as high as 60%. If your lawsuit takes months or potentially years to resolve, you could repay double or triple the amount you initially borrowed.
Lawsuit loans are not backed by the same level of consumer regulation from state and federal government as other financial products like personal loans and credit cards.
In some states, lawsuit lenders are compelled to adhere to state lending laws, but lenders often circumvent this by using terms like “advance” in the contract rather than loan.
The lack of widespread regulation within the legal funding industry means it can be challenging to find a reputable lender. Make sure you do your due diligence.
Lawsuit Loan Alternatives
Lawsuit loans can be a practical option for some people in certain situations, but you have many alternatives.
If you have savings, you could consider using some of your emergency fund and then replenishing it when your settlement arrives.
Perhaps friends or family could help you with a short-term loan.
A personal loan will usually offer more competitive interest rates as well as fewer fees. Your financial situation and creditworthiness will come into the play here, though, so you may not qualify for a loan.
You may also have the option of borrowing money against the equity in your 401(k) account or the equity in your home. This is a risky strategy that puts your home at risk if you fail to repay the loan in a timely fashion.
Think of lawsuit loans as a last resort, but one worthy of exploring if you have no superior options.