What are Lawsuit Loans? – Asked and Answered
Many people are curious about what lawsuit loans are and how they differ from traditional loans. Essentially, a lawsuit loan is a cash advance for plaintiffs expecting a settlement. The loan is secured against the potential future settlement, and repayment is only required if the plaintiff wins or settles the case. In this post, we explore the question: “What are lawsuit loans?”. We uncover what lawsuit loans are, how they work, their pros and cons, key factors to consider, and offer insights as to their use.
Understanding What Are Lawsuit Loans
A lawsuit loan, also known as legal funding or pre-settlement funding, is a cash advance provided to plaintiffs involved in pending lawsuits. Lawsuit loans are not loans in the traditional sense since repayment only occurs if the case is successful. Instead, they are a partial sale of the lawsuit’s future recovery. Because of this, lawsuit funding companies cannot pursue plaintiffs personally for repayment. Repayment must come from the settlement proceeds themselves. If the case is lost, no repayment is due.
Settlement loans are most commonly used in personal injury cases, including automobile accidents, medical malpractice, and workers’ compensation claims in some states. They provide financial relief to plaintiffs who need money for daily expenses, medical bills, or other urgent costs while their legal cases progress.
How They Work
The lawsuit loan process generally progresses through the following steps:
- Application: Plaintiffs apply for funding through a pre-settlement funding “lender”. The application process involves providing information about the case and the attorney handling it.
- Case Evaluation: The lender reviews the case details, focusing on its strength, potential settlement amount, and expected time frame. Unlike traditional loans, credit history or income levels are not key factors for approval.
- Approval and Offer: If lenders see the case’s potential, an offer is made. How much funding is available depends on the estimated value of the case and other factors. The amount offered is usually a fraction of the anticipated settlement value. A general rule of thumb is 10-15% of the case’s prospective settlement value, if the case were to settle immediately.
- Repayment: If the plaintiff wins or settles the case, the lender is repaid from the proceeds and in accordance with the lawsuit loan contract. If the case is lost, the plaintiff owes nothing.
This non-recourse feature makes legal funding unique, as they pose a lower financial risk to plaintiffs compared lawsuit loan alternatives.
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Pros and Cons of Legal Funding
Understanding the pros and cons of pre-settlement funding also helps understand what they are. When considering a lawsuit loan, plaintiffs benefit from weighing the benefits and drawbacks to make an informed decision. Lawsuit loan benefits include:
- Immediate Financial Relief – Legal funding provides immediate cash, which are normally used to cover living expenses, medical bills, or other expenditures during the lengthy litigation process.
- No Credit Checks – Credit scores are irrelevant for pre-settlement funding approvals. Access to legal funding is based on the case’s merits of the case, not the plaintiff’s credit score or income. Thus, plaintiffs who might not qualify for personal loans can still obtain lawsuit funding.
- Non-Recourse: If the lawsuit yields no recovery, no repayment is made. This makes lawsuit loans a risk free option for plaintiffs.
Lawsuit loan critics point to multiple problems. These include potentially high costs associated with the additional risk lawsuit lenders assume in the transaction. Lawsuit loan rate structures can vary but most reputable lawsuit funding companies will charge 18% every six-months after the advance date. Lawsuit loan fees can also contribute to the final repayment amount.
While costs are generally higher than personal loans, legal funding offers a specialty marketplace in which plaintiffs can sell a portion of their lawsuit prior to recovery. This service has risk and is priced accordingly. Characterizing lawsuit loans as predatory simply mislabels the free market’s response to plaintiffs’ legitimate needs.
What Are the Lawsuit Loan Requirements?
To qualify for a pre-settlement funding, plaintiffs typically need to meet several requirements:
- Active Legal Case: You must have an ongoing lawsuit with a potential for monetary compensation.
- Attorney Representation: An attorney must be handling your case, usually on a contingency fee basis (i.e., they get paid only if the case wins).
- Strong Case Merits: The case needs to show a reasonable chance of success, as this determines the lender’s willingness to provide funding.
Types of Lawsuit Loans
Pre-settlement funding comes in several varieties, each catering to different legal needs:
- Plaintiff Pre-Settlement Funding: This is the most common type, providing cash advances while the case is ongoing. The money is repaid if the case ends favorably.
- Plaintiff Post-Settlement Funding: For plaintiffs who have already reached a settlement but are waiting for the payout, post-settlement funding provides a bridge loan.
- Attorney Funding: This type supports law firms working on contingency, helping them cover costs related to case preparation.
Is a Lawsuit Loan Right for You?
Lawsuit loans are financial tools designed to help plaintiffs manage expenses during the course of a legal case. They offer significant benefits by providing non-recourse funds but come with high costs that can affect the final settlement amount. Understanding what legal funding is, how it operates, and what factors to consider can help you make a sound decision tailored to your financial needs during a legal battle.
Deciding whether to take a lawsuit loan requires a careful assessment of your financial situation and case prospects. If you have any questions regarding pre-settlement funding, give us a call at 888-964-2224. A live lawsuit loan representative will pick up the phone and answer all your questions.
Why Choose Fair Rate Funding
You obviously have a choice in who you use for legal funding. We offer:
- Simple and Easy Process – Approval only on the strength of your case.
- Risk – Free Proposition – Only repay if you win your case.
- Rapid Approval and Funding – Approvals often within 24 hrs.
- Up Front Pricing – Absolutely no hidden fees.
Give us a call and learn about your options. We are here to help and are at your service.
