The minute you found out you could get an advance on the lawsuit money you’ve been waiting for, you may have been ready to sign on the dotted line. It’s easy to give into temptation and accept a loan when you’re injured, out of work, and desperate. However, you should learn everything you can about legal funding before you commit to this option.
What is legal funding? This is the process of taking out a loan in which you use the expected lawsuit award as collateral. While it may seem like a faster way of receiving the money you would receive anyway, there are strings attached to this type of loan. If you do expect a settlement or award from a personal injury claim, this guide will help you decide if a settlement loan is right for you.
How Much Should You Expect To Pay In Interest?
The biggest concern you should have when borrowing money against your lawsuit settlement or award is how much you'll be paying in interest. As you might expect, this type of loan is accompanied by very high rates. In fact, it may be the highest of any loan types in today's market. On average, the rates vary from 26% to as much as 60% annually.
By the time you repay the loan in its entirety, it's very likely you will have paid back almost double what you borrowed or more. In the worst case scenario of paying 60% on a loan of $30,000, you would be forced to pay $18,000 just for the interest in that first year. If it takes you two years to repay the loan, your interest alone would cost you $36,000 on top of the $30,000 principle you would owe.
Why Isn't Lawsuit Lending Regulated?
The government regulates lending practices to ensure big lenders aren't taking advantage of their customers through predatory lending. These regulations include limiting how much can be charged in interest. However, these regulations don't apply to lawsuit lending because these transactions are not classified as loans in legal terms.
Instead, this type of transaction is considered a non-recourse purchase of a part of the expected award or settlement. While this means the plaintiff isn't responsible for repaying the loan if they lose their lawsuit, it also means interest rates are at the discretion of the lender.
How Does A Lawsuit Loan Work?
If you choose to pursue legal funding, the application process will involve the lender evaluating your lawsuit. They will look at the strength of your case, your chances for winning a jury award, and the total amount of damages you're likely to recover. If they deem you a good risk, they will offer you an advance that equals a percentage of your expected award.
If you accept the offer, you'll be given the agreed upon sum, but you won't have to start repaying the loan until your lawsuit is settled. It's important to remember that your attorney fees and court fees will be deducted from your award first.
By the time those costs are covered and your lawsuit loan is repaid, you could end up with nothing left from the award. In a worst case scenario, you could end up owing the lender even after they have claimed the remaining funds awarded in the lawsuit.
How Can You Cover Your Expenses Without A Lawsuit Loan?
The extremely high interest rates of legal funding can be prohibitive, yet people pursuing injury claims often have mounting medical debt that constitutes an immediate need. If you need extra money to cover your expenses until your lawsuit settles, there are other less costly options available to you.
If you can't get help from loved ones, consider applying for a more traditional personal loan. Another alternative that won't depend on a good credit rating is to start a crowdfunding campaign. If you're honest about your reasons for needing the money and you post regular updates, you'll be surprised by how many people are willing to give.
Legal funding or a settlement loan can be helpful if you need the money to cover time-sensitive expenses. However, if you're not experiencing a financial emergency and you can stand to wait for your case to be settled, a lawsuit loan may not be the best choice for you. In most cases, saving the money you would otherwise have to pay in interest is preferable over getting your money a few months earlier.
