Shop for Lawsuit Loans – Understanding the Process

Personal injury litigants in need of immediate cash to pay expenses can consider lawsuit loans.  Also known as pre-settlement loans or lawsuit funding, settlement loans provide immediate cash now in exchange for a portion of the future proceeds of your case.  If you are considering a lawsuit loan, consider also the points made in this post on how to shop for lawsuit loans.

Lawsuit Loan Basics

Essentially, a lawsuit loan is a contract between a “funder” and litigant in which the plaintiff sells a portion of the future proceeds of the case to the funding company.  If the case is successful, the money is repaid with “use fees” added to the amount received.  Use fees are often calculated by using percentages of the advance amount over time.

What makes the lawsuit loan unique (and unlike a traditional loan) is that the money is repaid only if the case is successful.  As such, a lawsuit loan is deemed non-recourse funding.  It is structured as a sale of property rights in future proceeds.  Because of this, the transaction falls outside many state’s usury laws.

What this means is pricing can vary greatly.  Therefore learning how to shop for lawsuit loans can make a significant impact on a litigant’s bottom line at the time of settlement.

Can You Qualify for a Lawsuit Loan?

Settlement funding companies manage considerable risk in offering lawsuit loans to the public.  This is because the advance is not repaid if the case is unsuccessful.  More often than not, a lawsuit lender will only advance money on a case if it is confident in its merits.

When you apply for a lawsuit loan, the lender contacts your attorney and compiles relevant documents.  These are needed to evaluate the case.  Cooperation with your attorney is required to make the process work.  He/she will also have to acknowledge the contract and agree to repay the amounts on the contract at the time of settlement.  The lawyer typically has to be retained on a contingency fee basis (i.e. he/she gets paid only if the case is successful).

You should understand what types of cases are available for funding.  Most lawsuit funding companies will not advance on landlord tenant actions, wage disputes, social security disability claims, and collections cases.  Be sure to shop for lawsuit loans by asking the representative or visit a lawsuit loan website to see what types of lawsuits the firm handles.

Most lawsuit funding companies will fund on the following:

• Product liability cases where a defective product caused an injury or accident.
• Personal injury cases, which include car accidents, slip and fall cases, and premises liability.
• Medical device cases involving devices that caused an accident or illness.
• Medical or legal malpractice actions where professional negligence caused damages.
• Employment law cases, which may involve discrimination or wrongful termination.
• Large commercial litigation cases.
• And others. . .

Cost Considerations

Lawsuit loans can be expensive, especially as compared to loans such as home equity lines of credit.  If you shop around for rates and terms, you will undoubtedly find that costs vary greatly.

Lawsuit Loan Cost Depends on Time

Because a lawsuit can take many months or even years to resolve, the timing for repayment is uncertain.  Many cases which normally qualify for lawsuit loans can take up to 4 years to settle.

When considering how to shop for lawsuit loans, plaintiffs should know that “rates” can run between 24% to 60% per year in certain circumstances.  Because all lawsuits have different facts and circumstances, it is difficult to know what rate would be charged for a specific lawsuit until after all of the facts of the case are considered.

However, routine applications for rear end auto accident lawsuit funding and slip and fall settlement funding can expect to be charged approximately 35%-38% per year on the amount of the contract every year until the case is resolved.  For companies which use a compounded rate structure for lawsuit loans, the cost can escalate at a higher rate if the case goes on past the 24 month mark.  (For more about compounding rates, click here).

First Check Other Options

Lawsuit funding is usually a last resort because of the above mentioned costs.    Settlement loan applicants normally consider loans from friends or relatives, credit card cash advances, or personal loans.  Others partially cash in retirement benefits such as 401k’s, IRA’s, or cash values in an insurance policy; utilize home equity lines of credit or obtain cash from other sources.  Some plaintiffs cannot secure much needed cash from any of these sources.  Luckily for them, reasonable lawsuit settlement loans are available as a possible solution.

Shopping for the Best Lawsuit Settlement Loan Company

Personal injury plaintiffs might find the task daunting, but the following are things you must consider when thinking about how to shop for a lawsuit loan.

Working with Your Attorney

The first person you should contact is your attorney.  Lawsuit funding is a permanent part of the legal landscape.  Your attorney likely has worked with funding companies in the past.  Although many attorneys will not directly recommend a funding company, many do have a list of “approved” funders they are comfortable working with.

Working With ALFA

The American Legal Finance Association (ALFA) is lawsuit funding’s trade association.  Members agree to adhere to certain guidelines that govern their participation in the business.  In return, funders pay dues to ALFA to pay for expenses such as legal representation in lawmaking and judicial proceedings.  For example, in the mid 2000’s, member firms approached then Attorney General, Eliot Spitzer in an effort to legitimize the business at a time when it was just beginning to expand.  The result was an industry’s best practices guideline outlined by the AG’s office.

It should be noted ALFA was formed to protect the interests of its members not the general public.  It should also be noted many lawsuit funding companies are not members of this organization for a variety of reasons.  Membership is not mandatory and clients do not have to use an ALFA member for funding.  They should however, make sure the funding company follows best practices.

Using Internet Search

There is no shortage of information regarding lawsuit funding on the internet.  This article is proof of that.  However, not all information is the same.  Many webpages, particularly those you reach when clicking on one of Google’s pay ads, are simply lead capture pages.  But if you look, you can find settlement loan company reviews, a range of rate comparisons and a variety of other information.  If you do your research, you will be more confident in tackling the steps outlined in the next section.

Once you’ve narrowed down the search, contact each lawsuit loan company and pin them down on the following:

Typical Lawsuit Loan Interest Rates

Settlement Loan Application and Other Fees

In addition to lawsuit loan rates, lawsuit lenders place processing and other fees on the contract.  This is industry standard and some processing fee is to be expected.  Origination fees are also sometimes charged, especially if you use a lawsuit loan broker, and can reach up to 20% of your advance.  Depending on the type of case, broker fees can usually be avoided.  It is important to understand whether you’re contacting a direct lawsuit lender or a broker who is originating business for direct lenders.

Type of Lawsuit Funding Interest

There are two general types of lawsuit funding cost calculations – simple and compounding interest.

Some lawsuit loans will charge a monthly percentage rate on the principal which compounds monthly on the previous months balance.  By way of example, a $10,000 funding contract at an industry common percentage rate of 3% per month, will cause the payoff to increase to $10,300 after the first month.  At the end of the following month, the percentage rate (3%) is applied to the previous month’s balance ($10,300) and NOT the original contract amount ($10,000).  At the end of the second month, the process continues.  This type of rate structure is known as compounding interest.

Confirm the Advance is Non-Recourse

Finally, when you shop for a lawsuit loan, confirm with the lender the advance is non-recourse.  Most, if not all, lawsuit funding contracts are structured as a purchase of the future proceeds of a claim.  If the claim is unsuccessful, the proceeds expire worthless and the funding company cannot seek repayment from the plaintiff.

Settlement Loans are Unregulated

The lawsuit loan business is unregulated in most jurisdictions.  Therefore, there are few restrictions on how much a settlement funding company can charge.  However, market forces usually keep the costs competitive.  That is why shopping for a lawsuit loan is so important.