Personal Loans

What Is a Lawsuit Loan, And How Does It Work?

So you’re bogged down by a lawsuit. Perhaps you’ve been injured in an automobile accident and can’t work, or maybe you’ve had to sue for medical malpractice. A lawsuit loan, or lawsuit settlement loan, may tide you over until you receive a future judgment or settlement award.

What is a lawsuit loan?

A lawsuit loan is a means of receiving money now in exchange for a future settlement or award amount plus interest. Because lawsuits tend to slog on for months, they can be a major drain on your bank account and patience.

A lawsuit loan can provide you some relief in paying for daily living expenses, mortgage payments or medical bills during the course of a lawsuit and before you receive a settlement or judgment, according to David Reischer, an attorney based in New York. A lawsuit loan can also give you additional time to negotiate a better settlement.

How a lawsuit loan works

With this type of loan, a lawsuit funding company provides you with cash in exchange for all or a portion of your lawsuit award or settlement. The company reviews your case and estimates how much money you may receive if you win or negotiate a settlement. That said, not all cases qualify for lawsuit loans. Because the lending company takes all the risk, they’ll only provide you with a loan if they strongly believe you’ll win or reach a settlement.

In exchange for the loan, you’re responsible for repaying the principal with the proceeds from your settlement or judgment along with a funding fee and interest. The interest payment may even be double or triple what you initially borrowed. However, you won’t have to pay more than your settlement or award.

In most situations, you’re not on the hook to repay the loan if you lose the case, or you may only have to pay back a smaller amount if you win less than expected. It’s not uncommon for plaintiffs to apply to half a dozen lenders before finding a company that will offer funding.

Pros and cons of a lawsuit loan

Easy to qualify for, but high interest rates

You may be able to get a lawsuit loan when you have no other collateral or even bad credit. But the interest rates are often high and may include expensive additional fees.

Lawsuit loan interest rates, or “funding fees,” are typically 2% to 4% per month. While 2% to 4% annual interest rates may sound like a good deal, these monthly rates add up to 27% to 60% or more per year. Should your lawsuit take several months or even years to win or settle, it’s possible you’ll end up paying two or three times what you initially borrowed.

“I myself have seen interest rates as high as 45% and junk fees in the several thousands of dollars range,” says Reischer.

Lack of consumer regulation

Lawsuit loans often don’t have the level of consumer regulation that federal and state governments enforce on other types of credit like credit cards and personal loans. There are courts and states that require lawsuit lenders to adhere to state lending laws, but Reischer says some lawsuit loan contracts use different vocabulary and may refer to the funds as a “loan” or “advance.”

“[Those terms] have different meaning under the law and may affect how borrowed monies are treated by a court if there is a dispute,” says Reischer.

Where to find lawsuit loans

Personal injury plaintiffs frequently get bombarded with lending offers in the mail on top of seeing cheesy television commercials and online ads. Two of the best ways to find a reputable lawsuit loan include:

  • Your attorney: They will most likely have experience regarding trustworthy lenders. He or she may also review the fine print and help negotiate better terms.
  • Through American Legal Finance Association: ALFA puts out a list of best practices its members must follow regarding lending amounts, disclosure requirements, conflicts of interest and false advertising. However, the association’s main goal is to help its member companies, not you.

How to compare lawsuit loans

Before you sign on the dotted line, contact lenders and ask about the following:

  • Interest rates: This information is usually hard to find due to high rates or because the lender will want to review your case before quoting a rate.
  • Application fees: Most lenders will assess your case for free but some may charge for an evaluation.
  • How often interest compounds: Most lenders compound monthly, while some may compound more frequently. Remember the more the interest compounds, the more money comes out of your settlement or award.
  • What happens when you win or lose your case: You should find out if you’ll ever have to pay the lender more than your award or settlement amount, and whether you’ll have to pay anything if you lose your case.

Personal loans may be a viable alternative

A lawsuit loan could be a practical option in certain situations, but a personal loan may offer more competitive interest rates and fewer fees depending on your creditworthiness and financial situation.

A personal loan is a type of unsecured debt that, similar to a lawsuit loan, does not require collateral and is money you can use to cover living expenses.

LendingTree, a loan comparison website, has an online form you can complete to view personal loan offers from up to five lenders. When reviewing lenders, you may consider factors such as:

  • APR: The annual percentage rate represents your loan’s interest rate plus fees. It is a broad measure of your cost of borrowing.
  • Interest rate: The interest rate is your cost of borrowing minus other fees. Traditional personal loans come with fixed interest rates. Borrowers with bad credit are more likely to see higher interest rates than those with good credit.
  • Repayment term: Personal loan terms usually span 12 to 144 months. You’ll repay your loan with fixed payments over that time.
  • Funding time: Some lenders may release loan funds within one business day of application approval. This can be important if you need access to fast cash.
Personal loan lenders to consider
LendingPoint Best Egg FreedomPlus
APR 9.99% to 35.99% 5.99% to 29.99% 7.99% to 29.99%
Terms 24 to 48 months 36 or 60 months 24 to 60 months
Loan amount $2,000 to $25,000 $2,000 to $35,000 $7,500 to $40,000
Credit score requirement 585 640 Varies

FAQ: Lawsuit loans

Yes, but it’s unethical for lawyers to lend you money due to the potential conflict of interest. A lawyer may be more interested in settling a case to get their money back instead of waiting until the settlement is right for you.

It depends on your case. Because lending companies take all the risk, they’ll want to be confident in your ability to win the case or reach a settlement that covers the loan.

It may be possible, but lawsuit loan lenders are much more likely to provide you with funding if you have an attorney. If you receive approval, you’re liable to face steeper interest rates and a more in-depth application process.

The lawsuit funding company will evaluate your case to forecast how much you may win or receive in a settlement. The length of time it takes to receive a loan varies based on the case and individual company, but the lender will offer a sum of money immediately after approval.

As a general rule, the American Bar Association Model Rules of Professional Conduct 1.8 stipulates lawyers may only provide financial assistance to clients to cover court costs and litigation expenses. However, some states completely bar attorneys from lending money to clients.

While some courts and states mandate lawsuit lenders comply with existing lending laws, most lawsuit loans do not fall under the typical amount of regulation you’ll find with mortgages and car loans. Lawsuit funding companies have few restrictions regarding how much they can charge and how they must disclose interest rates and other terms.
 

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