Sometimes clients may have financial issues when trying to pursue a personal injury claim. Maybe they are recovering from a serious injury and can’t work, and the cost of treating the injury is so high that they can’t afford basic living expenses. Even though retaining an attorney for their claim may increase their chances of a better settlement, they might accept a lower settlement than they deserve to ease their financial burden.
However, there are solutions for clients who need money now but cannot wait for their settlement. If you handle personal injury cases, chances are you have heard of lawsuit loans or pre-settlement funding. Whether you have worked with a pre-settlement lender before or not, here are 8 things you need to know about lawsuit loans for personal injury cases.
1: Lawsuit Loans Aren’t Traditional Loans
A lawsuit loan, otherwise known as pre settlement funding or litigation financing, is a cash advance for a potential settlement award or judgment. Unlike a traditional loan, pre-settlement funding is provided to the client in exchange for a portion of their settlement. This means that the lender is investing in the outcome of the case.
2: Interest Rates Widely Vary
Since the lawsuit loan industry is risky for lenders, they typically charge interest rates ranging anywhere from 27% to 60% and compound interest monthly. This means that if a client borrows $25,000 from a pre-settlement lender and settles in one year, they could owe an additional $6,750 to $15,000 in interest. As a result, most people avoid applying for a lawsuit loan unless they desperately need the money or they are close to settlement.
3: Pre-Settlement Funding is Mostly Unregulated
Since pre-settlement funding isn’t considered a traditional loan by the federal government and most state governments, the industry remains unregulated. There are many loan sharks out there trying to pass off as a reputable lender, so it can be difficult to find a company that’s trustworthy. However, you can find a list of reputable lawsuit loan lenders on the American Legal Finance Association’s website.
4: Not All Cases Qualify for Pre-Settlement Funding
Since lenders take a tremendous risk by investing in the outcome of cases, they do not fund all types of claims. In fact, most lenders require applicants to have an attorney representing their case before they apply. In addition, lenders usually contact an applicant’s attorney to gather information about the case in order to evaluate its potential for success.
In general, if the applicant is very likely to win the case, the lender approves the application. However, don’t be surprised if a client needs to apply to five or six different companies before they have their application approved.
5: Most Lawsuit Loans Are Non-Recourse
Part of the reason that lawsuit loans aren’t considered traditional lending is because they are non-recourse. This means that if a lender provides pre-settlement funding to someone and they lose their case, they are not responsible for paying back the loan. Reputable lenders absorb the entire financial loss.
6: Reputable Companies Send Money to the Client Within 24 Hours of Approval
Since many of the people who apply for lawsuit loans are financially struggling, lenders try to get through the underwriting process as soon as possible. When someone submits their application for a lawsuit loan, the lender tries to get in touch with their attorney within the next business day to get the case files. This process could take anywhere from a single day to a couple of weeks, depending on the details of the case and how fast the underwriters receive case documentation.
After the lender approves the application, they typically send money to the applicant by direct deposit, money order, or check.
7: Applying for a Lawsuit Loan Doesn’t Require a Credit Check or Income Verification
Another reason why lawsuit loans don’t have the same regulation as traditional loans is because applying doesn’t require a credit check or any form of income verification. Applicants don’t even need to be currently employed to qualify for pre settlement funding.
Instead, lenders determine whether or not someone qualifies for a lawsuit loan based solely on the strength of their case. If a client has a strong case that is nearing a settlement agreement or judgment, the lender might choose to fund the applicant. However, if a client has a case that is in its early stages, the lender may deny the application.
8: The Funds from a Lawsuit Loan Can Pay for Nearly Any Expense
There are no spending restrictions for clients who receive pre-settlement funding. In fact, many people who receive a lawsuit loan use it to pay for a variety of expenses, including:
- Mortgage payments or rent,
- Car insurance,
- Property repairs,
- Groceries, and
- Utilities or other bills.
However, there are a few restrictions in place for members of the American Legal Finance Association. ALFA’s code of conduct restricts member lenders from overfunding cases and influencing the outcome of the case. This means that they cannot willingly pay commissions to an attorney or promise payment of any legal fees. That burden falls on the client who receives funding.
Some Final Things to Consider About Lawsuit Loans
Filing a lawsuit can be expensive for some clients, especially if they require a lot of medical treatment due to an injury. However, lawsuit loans help ease the burden for those at risk of losing their house, car, or more while waiting for their case to settle.
While pre-settlement funding remains largely unregulated, there are reputable companies out there that support consumer protection efforts and offer fair interest rates. If you have a client looking for pre-settlement funding options, websites like the Better Business Bureau help narrow down the search to companies that utilize best practices and have a transparent underwriting process. Whether your client’s case has a high value or is likely to get a fair settlement offer, a lawsuit loan might be a good option to help keep your client financially stable.