Lawsuit Loans: Help or Hidden Financial Trap

What Is a Lawsuit Loan? How Do They Work? What Are the Risks Involved?

If you’ve been hurt because of someone else’s wrongful act and are unable to work, the compensation you can potentially receive in a personal injury settlement or verdict can be critical to meeting your financial needs. The legal process, though, can be painstakingly slow, even when your case seems pretty strong. There are companies, though, that will advance you funds on your prospective recovery, so you can meet your day-to-day expenses. These transactions are commonly referred to as lawsuit or pre-settlement loans. What are they? How do they work? What are the potential risks involved? Do they really help, or are they mostly a hidden financial trap?

What Is a Lawsuit Loan?

A lawsuit or pre-settlement loan is a financial arrangement where a party to a lawsuit receives some funds before the settlement or verdict is paid. As a general rule, eligibility for lawsuit loans is based on the nature and strength of the case. Accordingly, not all litigants qualify for funding.

How Does a Lawsuit Loan Work?

A lawsuit loan is a debt agreement, whereby the party receiving the funds enters into a legal contract to repay the funds received. Interest accrues until the loan is paid off. Accordingly, to pay off the loan, the borrower must pay both the principal amount and interest for the time the loan was outstanding. If the borrower loses in court, or fails to negotiate a settlement, the debt must still be paid.

Be careful not to confuse a lawsuit loan with an advance funding arrangement. An advanced funding arrangement has significantly different consequences because it does not create a debt obligation and therefore is not really a loan. Instead, the person receiving the funds pledges a percentage of any recovery to the lender. If the litigant loses in court, there’s no obligation to repay any amounts advanced. However, the lender takes the pledged percentage of the judgment or settlement, even when that percentage exceeds the amount advanced.

What Are the Advantages and Disadvantages of Lawsuit Loans?

Lawsuit loans can offer a number of benefits:

• You’ll have immediate access to financial resources, so you’re not struggling to meet your obligations while waiting for your case to be resolved.
• In most instances, you won’t have to make installment payments. The lender is typically paid from the proceeds of your settlement or judgment.
• You may not need a credit check. Most lawsuit loans are based on the facts and strength of the case, not on your creditworthiness.
• You won’t have as much pressure to settle, so you may be able to get a better outcome

You should exercise caution, though, when considering a lawsuit loan:

• Interest rates can be exorbitant, commonly ranging from 25% to 60% per annum. That can quickly dissipate a settlement or judgment.
• Lawsuit loans are subject to little regulatory scrutiny, so predatory practices are fairly common.
• You may feel pressure to settle sooner if you’re racking up substantial interest due.

When Is a Lawsuit Loan a Good Option?

A lawsuit loan should be considered only when other options are unavailable. Before considering a lawsuit loan, see if you can get financial assistance from friends or family while your case is pending. In addition, you may be able to use credit cards, negotiate new payment arrangements with creditors, or even get help from your church or a charitable organization. If no other viable sources of assistance can be found, and you’re facing severe financial hardship, a lawsuit loan can help.