Understanding Lawsuit Loan Disadvantages
Lawsuit loans, also known as legal funding or pre-settlement funding, provide financial relief to plaintiffs awaiting settlement. While these loans can be a lifeline for individuals in urgent need of cash, it’s essential to weigh the potential lawsuit loan disadvantages before making a decision. In this post, we examine the main lawsuit loan disadvantages.
High Interest Rates and Fees
One major lawsuit loan criticisms is their cost. To be sure, lawsuit funding is costlier than traditional loans. Often, lawsuit loan rates are 40% or more annually. Some companies offer compounding rates which can also increase the payoff amount. Some impose additional fees, making the total repayment amount even higher. This is one notable lawsuit loan disadvantage.
For example, if you borrow $10,000 and the funding company charges an annual interest rate of 35%, your repayment could double in just a few years if your case takes time to settle. This is the reason why lawsuit loans are usually a last resort for plaintiffs in a financial bind.
Risk of Over-Borrowing
Lawsuit loans are typically structured as non-recourse funding, meaning you only repay the loan if you win your case. While this is not a disadvantage, it can lead to a false sense of security. Plaintiffs may borrow more than they truly need, forgetting that the repayment amount will come directly out of their settlement, potentially leaving them with less than anticipated.
Lawsuit loan companies make money by advancing funds to plaintiffs. The more money advanced, the more they earn. Companies, however, are more concerned with recouping their capital than making risky transactions where the potential settlement fails to be sufficient. For this reason, companies will normally cap their advances to 10-15% of the expected recovery. This normally makes this lawsuit loan disadvantage not a likely occurrence.
Reduced Settlement Amount
Lawsuit loans are repaid from the final settlement. This obviously reduces the amount a plaintiff receives. Plaintiffs who expect a large payout might find themselves disappointed when they see how much of their settlement is consumed by loan repayment.
Worse, if a case settles for far less than expected, plaintiffs can find themselves in the position of receiving nothing at the time of disbursement. Of course, they did receive the advance but this is hardly any consolation. Fortunately, settlement loan companies will rarely allow their contract to stand in the way of settlement. Most will negotiate the payoff so as to not stand in the way of the settlement. Thus, reduced settlements can be one of the lawsuit loan disadvantages.
Lack of Regulation as a Lawsuit Loan Disadvantage
The lawsuit funding industry is not as heavily regulated as traditional lending markets. This can be a disadvantage. Lack of oversight can lead to predatory practices by some companies, including unclear terms, hidden fees, and excessively high interest rates. It’s crucial to carefully read and understand the terms of any lawsuit loan agreement before signing, as lack of regulation is one of the lawsuit loan disadvantages.
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Lawsuit Loan Limited Availability
Not every case qualifies for a lawsuit loan. Funding companies evaluate the merits of your case and the likelihood of a favorable settlement before approving your application. If your case is deemed too risky or if the potential settlement amount is low, you may not be eligible for funding. Limited availability can be one of the lawsuit loan disadvantages for many plaintiffs.
Most personal injury cases are good candidates for advances. Others include wrongful termination, malpractice, malicious prosecution and others.
Impact on Case Strategy
Some might argue receiving a lawsuit loan can inadvertently impact your legal strategy. Plaintiffs under financial pressure may feel compelled to settle their cases prematurely to stop interest from accruing, potentially accepting less than what their case is truly worth.
This scenario is rare as the very purpose of lawsuit loans is to allow plaintiffs to meet their obligations while their cases are litigated. Allowing attorneys to secure the maximum recovery possible is the mission of every lawsuit funding outfit. Unfortunately, there may be disadvantages in lawsuit loan structures which affect legal strategies.
Alternatives to Consider
It’s important to realize that lawsuit loan alternatives can be available. Before pursuing a lawsuit loan, plaintiffs usually consider more cost-effective options. These could include:
- Borrowing from friends or family
- Negotiating payment plans with creditors
- Utilizing savings or other assets
- Seeking assistance from nonprofit organizations
Lawsuit Loan Disadvantages – Key Takeaways
While lawsuit loans can provide immediate financial relief, the disadvantages—such as high interest rates, reduced settlement amounts, and potential impact on your legal strategy—are important to consider. Lawsuit loans may seem like a quick fix, but the disadvantages can outweigh the benefits for some plaintiffs. Evaluate all your options before committing to legal funding. By understanding these drawbacks, you can better assess whether a lawsuit loan is the right choice for your situation. Always consult with your attorney and carefully review the terms of any funding agreement to ensure you’re making an informed decision.
