lawsuit loan rates Archives

The legal funding loan industry operates in many jurisdictions in an unregulated marketplace. Accordingly, lawsuit loan rates can vary. Most competitive legal funding loan rate structures, for preferred cases, charge roughly 36% a year. The charges can be calculated either “simple” or “compounded”. This post will explain the differences between the two lawsuit loan rate structures.

Legal Funding Rate Structure Types

Legal Funding loan businesses use generally two different types of rate structures. The first type is often termed “compounding”. A compounding rate means you are charged on the borrowed principal and the accumulating interest. This type calculates repayment by charging a monthly percentage rate on the contract amount. The next month the percentage rate is charged on the repayment amount (monthly balance). Because this calculation charges interest on the balance and not the original contract amount, the charges are said to “compound” monthly.

The second type of charge applies a percentage rate on the original contract amount in 6-month increments. This non-compounding rate structure is also known as “simple” interest”.

Let’s look at a couple of examples to illustrate the lawsuit loan rate structures.

Lawsuit Loan Simple Rate Structure

The repayment of a $10,000 contract at 18% simple rate looks like this:

0-6 Months $11,800

6-12 Months $13,600

12-18 Months $15,400

18-24 Months $17,200

24-30 Months $19,000

30-36 Months $20,800

If a case was funded January 1 and the cash advance repaid before June, the repayment would be $11,800. If instead the advance was repaid after June but before December 31^st, the repayment would be $13,600. So each 6 month period results in $1,800 increase in repayment.

Legal Loan Compounding Rate Structure

Now let’s examine a legal loan compounding rate structure of that same $10,000 contract at 18% every 6-months. Only this time, the loan repayment is calculated at 3% compounded monthly. The payoffs for this rate structure would be:

0-6 Months $11,941

6-12 Months $14,258

12-18 Months $17,024

18-24 Months $20,328

24-30 Months $24,273

30-36 Months $28,983

Clearly the repayment for a compounding rate is more expensive. This is because the monthly charge (3%) is calculated on the previous month’s balance. That is, after month 1, the balance is $10,300 after calculating the rate. In month 2, the 3% is calculated on the 10,300 and NOT on the original contract amount. That is the difference.

Remember, the same 6-month repayment parameters still exist. That is, if a case was funded January 1 and the cash advance repaid before June, the repayment would be $11,941. If instead the advance was repaid after June but before December 31st, the repayment would be $14,258.

What We Can Learn from Legal Loan Rate Examination

The first thing to realize is that lawsuit loan rate structure matters. It can literally mean a savings of thousands of dollars over time.

Second, lawsuits can take several years. Yet very few plaintiffs are aware of this fact. It seems that everyone thinks their case is going to settle in “6-months”. This may be due to their naivete. It could also be because attorneys sometimes tell their clients it won’t take much longer. Regardless, the statistics don’t lie. And the statistics show that most lawsuits take more than 18 months to resolve.

Thirdly, simply placing a lower number as a “rate” can at first glance seem like a better deal. Of course, the devil is in the details and there are a few companies who advertise a lower nominal rate (e.g. 3%) but the repayment winds up being far more because of the compounding nature of the rate structure. Consider the above $10,000 example after 3 years. The repayment is over $8,000 more with the compounding rate. That’s a real difference.

Legal Loan Rate Structure Conclusions

The purpose of this post is to educate the reader about the different types of rates structures most often employed by lawsuit legal loan companies who advance money on pending lawsuits. As the above analysis suggests, the type of structure used can have a significant impact on the repayment amounts in these financial transactions.

Those who try to learn how to shop for lawsuit loans would do themselves a service by understanding legal funding rate structures and making sure they are in the structure that best serves their specific needs.

Settlement Funding Costs Explained

In previous articles, we examined the historical cost of settlement funding in the lawsuit cash advance funding industry. We also discussed the business dynamics that often change pricing in any business which puts capital at risk for profit. We discussed the settlement loan industry evolving from an enterprise charging as much as 10% per month as “interest” on lawsuit cash advances to a business where applicants are routinely “funded” for as little as 18% per six month period.

In this entry, we examine case loan cost and analyze it from the perspective of an applicant who is in dire need of cash for whatever reason. From this angle, we can more accurately assess the costs associated with this type of financial relief – only available for those who have a pending lawsuit.

Since every person’s circumstances are different, weighing the lawsuit loan cost against the future proceeds of an individual’s pending case can only be accomplished on a case by case basis. For this reason, perhaps the best way to illustrate the point, is to use a hypothetical example.

Cost of Settlement Funding – Hypothetical Example

Consider the following:

Due to injuries sustained from a negligent driver of another individual, a 36 year old plaintiff finds himself unable to work and support himself and his family since 2008. The plaintiff has exhausted all other roads for seeking financial relief such as; borrowing money from his friends and family, taking out a home equity loan against the value of his home, he has gone through his disability payments from work and the other “benefits” he receives do not cover his monthly expenses and he is most currently 5 months in arrears on his mortgage and property tax payments.

Forced with a probable foreclosure proceeding, this plaintiff’s options are limited. On the one hand, he can file bankruptcy, which could save his home but would ruin his credit rating for many years. He can hire an attorney for this but the attorney requires payment up front for his time and expertise.

Another option is to obtain lawsuit funding to help with his liquidity issues. Let us briefly delve a little deeper in the analysis.

Comparing Costs

We already discussed the costs associated with lawsuit cash advances. But what about the cost of not being able to pay bills on time, or at all? We may not be able to quantify the costs exactly, but we can at least identify some potential problems. For example, defaulting on a mortgage could result in the following “costs” for the homeowner.

Removal from the Dwelling. The defaulting party must then find shelter. Normally, a rental unit requires first and last month rent plus a security deposit. That is three months rent up front from the new tenant. Of course, if the person has three months rent, he would probably be able to at least delay the foreclosure process. So there is a liquidity problem on top of the existing problem. One can easily foresee multiple “costs” associated with being removed from a place of residence (e.g. moving costs, additional fuel expenditures, storage fees, etc.).

Destroyed Credit Scores. Like it or not, this country operates on debt. “Who is indebted to whom?” is the oldest and arguably the most profitable game in history. Access to credit is an integral part of the game and are a function of credit scores. Obviously, a mortgage foreclosure would severely hamper a person’s access to credit for car loans, future home purchases, appliances or even credit cards. Further, even if credit is offered, the interest rates charged will be far more than otherwise would be required.

Conclusion

When thinking about the above, it is helpful to weigh the long term effects of these events. The real problem is how to accurately assess the cost and compare them to obtaining a lawsuit cash advance funding against a case. Ultimately, the analysis depends on individual circumstances. Fortunately, the lawsuit funding business exists for those persons who make the analysis and choose lawsuit loans as a possible solution. Thousands of people make this choice each and every day.

Thank you for your interest in the pre-settlement loan business.

Simple v Compounding Rates in Legal Funding

lawsuit loan rates