Differences Between Personal Loans and Lawsuit Loans
Personal loans and lawsuit loans may serve the same purpose – getting the debtor/seller flush with immediate cash. Yet the mechanisms each uses to accomplish this task vary greatly. In this post, we examine the differences between personal loans and lawsuit loans in greater detail and leave readers to decide which course of action best suits their needs.
Personal Loans Basics
Personal loans are usually installment type loans offered by banks and traditional lenders. These might include savings and loan institutions, credit unions and other lenders. Obtaining personal loans and lawsuit loans both begin with an application and ends with the client getting money. That’s where their similarities typically end. Below is a brief summary on personal loans.
Application and Approval
Applicants complete an application with the lender. This includes information such as personal details, income, employment status, and credit history. The lender reviews the application and conducts a credit check to assess creditworthiness. Credit scores and credit history play a significant role in determining qualification and what terms are offered.
If the lender’s eligibility criteria are met and application approved, an offer is made outlining the loan amount, interest rate, repayment term, and other terms and conditions.
Acceptance and Funding
Once the terms are agreed upon, a loan agreement (promissory note) is executed (signed). Once the documents are signed, the lender disburses the funds either through direct deposit or by check.
Repayment
Personal loans are typically repaid in fixed monthly installments over a predetermined period, which is usually between one and seven years. Each installment consists of a portion of the principal amount borrowed plus interest.
Interest Rates and Fees
Banks decide what rates are available to debtors and vary based on credit score, income, and the lender’s policies. Current personal loan rates range from 7%-30% annually. Additionally, some lenders charge origination fees, late payment fees, or prepayment penalties.
Credit Impact and Uses
Taking out a personal loan impacts your credit score. Making timely payments can help improve your credit score, while missing payments can have a negative impact. Additionally, applying for multiple loans within a short period can result in multiple hard inquiries on your credit report, which can temporarily lower your score.
Personal loans are used for a variety of purposes, including debt consolidation, home improvement, medical expenses, education, living expenses, and more.
Personal loans offer flexibility and can provide quick access to funds for various financial needs. However, there are some limitations so comparing personal loans and lawsuit loans is in order.
Lawsuit Loan Basics
Before we compare personal loans and lawsuit loans, it’s important to understand some lawsuit loan basics.
First, because legal system delays are common throughout the United States, plaintiffs often run in to financial trouble while they wait for their cases to resolve. This is especially true if plaintiffs are unable to work due to accidents (personal injury lawsuits are common lawsuit loan types). The purpose of settlement loans (lawsuit loans) is to allow plaintiffs in civil lawsuits the ability to tap into the value of their potential recovery to pay much needed expenses.
While sometimes referred to as “lawsuit loans” or “settlement loans”, these transactions are not loans in the traditional sense. Instead they are an assignment (sale) of property rights in the lawsuit’s future value, if any.
Obtaining lawsuit loans is easy and straight forward. The elements of the lawsuit loan process is outlined below.
Application and Paper Chase
Plaintiffs will contact a lawsuit funding company to ask how to qualify for lawsuit loans. The company will ask a few preliminary questions and pre-qualify the applicant after the questions are answered. If, upon answering the questions, the company feels they are not interested, the applicant is notified as well. Pre-qualification means a plaintiff likely has a “fundable lawsuit” which warrants further investigation. Pre-qualification ends with plaintiffs completing an application for funding. This starts the process.
The next step is gathering documents that prove the elements of each case. Funding companies reach out to plaintiffs’ lawyers to secure this evidence and approval depends greatly upon the receipt of evidentiary support.
Underwriting and Approval
Once the documents are received, they are sent to underwriters who review them. Their next task is to interview the attorney regarding the details of the case and everyone’s expectations. Afterwards, a final decision is made.
Funding and Repayment
When a lawsuit is approved, a contract is prepared and forwarded to the client and the attorney. Upon execution, the plaintiff receives immediate cash via overnight check or electronic bank transfer.
Lawsuit loan contract terms dictate that repayment comes from the lawsuit proceeds. When a case is resolved, the representing attorney repays the advance on pending case according to the terms of the agreement.
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Personal Loans and Lawsuit Loans Compared
Personal loans and lawsuit loans might serve similar purposes, but there are distinct differences. Below we examine some of the most important.
Difference in Purpose
There may not be that much difference between the purpose of personal and lawsuit loans. Personal loans are typically used for personal expenses, such as debt consolidation, home improvement, medical bills, or unexpected expenses. Lawsuit loans provide financial assistance to plaintiffs involved in ongoing legal cases. They are also used to cover living expenses, medical bills, and other costs while awaiting the resolution of a lawsuit.
Use of Collateral
Personal loans can be secured or unsecured. Secured loans require collateral, such as a home or a car, while unsecured loans do not require collateral but may have higher interest rates. Unsecured loans can be credit card debt or other products.
Lawsuit loans advance money on pending cases but the transaction does not consider the lawsuit as collateral. Instead, plaintiffs sell part of their interest in the settlement or recovery. Lawsuit loans are non-recourse, meaning they are not secured by any personal assets. Nor can the funding company pursue the plaintiff personally for repayment. If the case is lost, the plaintiff is not obligated to repay the loan.
Approval Process
Personal loan approvals are based upon the creditworthiness of the borrower. Factors such as credit score, income, assets, employment history, and debt-to-income ratio are often considered. Lawsuit loan approvals are based on the strength of the lawsuit and the likelihood of winning a settlement or judgment. Credit score and income are generally not considered.
Repayment
Personal loans are generally repaid in installments shortly after disbursement. Most of the time the payments are fixed and paid over a specified time frame. Lawsuit loans contracts mandate the advance be repaid only if the case is successful. When a lawsuit is resolved, money is typically deposited in an attorney trust account and disbursed by the attorney. Lawyers are tasked to repay lawsuit loans from these proceeds and at the time of lawsuit settlement disbursement.
Personal Loan and Lawsuit Loan Cost
Personal loans interest rates vary based on factors such as creditworthiness, loan amount, and loan term. There may be origination fees and other charges associated with personal loans. Lawsuit loan rates generally range from 35% to 50% per year and may be more expensive than personal loans. Lawsuit loan pricing reflects the higher risk involved for the lender. Additionally, there may be fees such as application fees, underwriting fees, and servicing fees.
Personal Loan and Lawsuit Loan Regulation
Personal loans are highly regulated by consumer protection laws and overseen by government agencies to ensure fair lending practices. Lawsuit loans are unregulated in many states. Others regulate the practice. There is ongoing debate about the need for lawsuit loan regulation to protect the public from predatory pricing in the industry.
Discussion Takeaways
While both personal loans and lawsuit loans provide financial assistance, they cater to different needs, have different approval processes, repayment terms, and regulatory environments.
At Fair Rate Funding, we operate in the specialty niche of settlement funding. We act as plaintiff advocates by supporting plaintiffs through the litigation process. Although the financial world consists of many complicated and technical products and services, lawsuit loans don’t need to be confusing. They are simply an advanced sale of a future asset – lawsuit proceeds. They are essentially the same as the sale of any personal property.
If you have any questions regarding personal loans and lawsuit loans, we are here to help. Give us a call or contact us online. You will speak to a live representative who can field all your questions.
Thank you for your interest in lawsuit funding.
