This guide will answer the following questions:
What is a lawsuit loan?
How does it work?
Will my lawsuit qualify?
What does this sort of advance cost?
How can I avoid overpaying for funding?
Managing daily living expenses can be difficult if you’re injured and out of work. You might have heard from TV ads, social media or your attorney that a product called a “lawsuit loan” or “legal funding” can help.
What is a lawsuit loan?
A lawsuit loan is a cash advance that uses your expected future settlement as collateral in exchange for an upfront cash payment.
Typically, repayment of the advance is contingent upon the success of your case. That means that if your legal case is not successful, the advance is not repaid. As a result, a lawsuit loan is not technically considered a loan in many states.
Lawsuit cash advances help plaintiffs pay for bills while they wait for an eventual settlement. They can be an exceptionally powerful tool for a plaintiff in need. However, not all cases qualify for funding and – much like a payday loan – the money often comes at a very high cost.
How does pre-settlement funding work?
Thankfully, legal funding is pretty simple. A plaintiff represented by an attorney on a contingency basis requests funding from a lawsuit lending company. That company decides whether or not they can approve the plaintiff for funding – and how much they can approve – based on the merits of their civil claim.
If the settlement loan company decides to approve funding, they send the plaintiff and their attorney a legally binding contract that spells out the terms of the advance. Basically, the contract is a purchase and sale agreement wherein the plaintiff is agreeing to sell a portion of the proceeds from their claim in exchange for an upfront payment. The plaintiff’s attorney is agreeing to repay the funding company from the plaintiff’s portion of the proceeds.
Usually, once a plaintiff and their attorney sign the purchase agreement, the lawsuit loan company disburses funds via wire, direct deposit, Western Union, MoneyGram or via check.
Will my lawsuit qualify for a cash advance?
Whether or not a plaintiff’s lawsuit will qualify depends on a few important factors.
- The age of the injured party – most reputable funding companies will not advance funds against a claim in which the injured party is a minor
- Attorney representation on a contingency basis – to qualify for a pre-settlement loan, a plaintiff be represented by an attorney who controls the settlement proceeds and is paid on a no-win / no-pay basis
- Provable negligence claim – a plaintiff must have a valid legal claim where there is clear and documented negligence on behalf of a third party. Pre-settlement funding companies do not typically provide advances on speculative claims.
- Quantifiable damages – a plaintiff must have injuries and treatment or otherwise calculable damages (e.g. lost wages) to have a valuable claim. Lawsuit funding companies are unlikely to provide funding on a claim unless there are obvious and quantifiable damages.
- Defendant’s ability to pay – the negligent party must have the ability to pay for any award or settlement due to the plaintiff. In most cases, this is an insurance company. In all cases, it must be very clear that the defendant can and will pay for the plaintiff’s damages in the event of a successful resolution to the legal claim.
What does a lawsuit loan cost?
Lawsuit loans are expensive. There is no such thing as a cheap lawsuit loan. Many plaintiffs end up repaying more than three times the amount that they borrowed. Some legal funding companies mislead plaintiffs about the true costs involved.
Generally, these sorts of advances come at a cost of as low as 2% to as high as 8.99% monthly. Often, funding companies will provide quotes in a large range, such as 1% to 3%, conveniently forgetting to explain that the rates are compounded, charged monthly and that 95% of plaintiffs are charged more than 2.75%.
So what does a lawsuit loan cost? Well, a lot. For a thousand dollar advance, an average payback table would look something like:
Minimum repayment: $1,500
If the advance is paid back after:
- 6 months and before 12 months: $1,800
- 12 months and before 18 months: $2,250
- 18 months and before 24 months: $2,750
- 24 months and before 30 months: $3,250
- 30 months and before 36 months: $3,750
While this is typical for the consumer litigation funding industry, it is also grossly unacceptable. Legal funding companies argue that the risk justifies this exorbitant cost, but that’s simply inaccurate – most only fund strong cases with a high probability of success.
It is imperative that a plaintiff considering entering into a lawsuit advance arrangement take certain steps to avoid being overcharged for a lawsuit loan.
First, try to consider alternatives. There are several local, state, and federal programs that can help cover living expenses in an emergency. It’s also ok to lean on friends and family when times are tough. If you have equity in your home, now would be a good time to consider tapping that equity – a mortgage is the cheapest source of capital you’ll find.
If you’ve exhausted all other options, see below for some tips on how to pay less for funding.
How can I avoid overpaying for a lawsuit loan?
If you absolutely need the money and you do not have any other place to turn, there are some steps you can take to avoid overpaying for a lawsuit settlement loan.
First, always call several pre-settlement loan companies and ask for specific quotes with a sample payoff schedule for your requested amount of funds. Avoid providing case information or your attorney’s contact information before collecting this information. You can find tons of companies providing this service by searching on Google, asking your attorney, or using a directory like Compare Lawsuit Loans.
Second, compare these quotes and choose a few companies to move forward with. Let your attorney know which companies you decided to request funding from.
Third, compare any offers to the quotes you were provided and to the other offers. Choose the best one.
As a rule of thumb, you should look for the following general terms to avoid overpaying for an advance:
- Simple, non-compounding rates that are equal to or less than 3.333% monthly or 20% every 6 months
- Processing, application fees, origination and delivery fees (combined) that are less than or equal to $100 for small advances of less than or equal to $2,500 and less than $250 for amounts over $2,500
- A cap on payback such that the amount you pay back never exceeds two times the amount you borrowed
