What are they?
Personal Injury lawsuit loans are not a traditional loan, in the true sense. They should be thought of as a cash advance on a potential future settlement. The loan amount is normally only 10% of the expected amount you would receive from a settlement. If you settlement is expected to by $50,000, the lender might only offer you $5,000 in advance. They are a fairly new product and are not as regulated as traditional loans are. They often have very high interest rates & “funding fee” structure associated with them.
They go by various names, such as “lawsuit cash advances”, “pre-settlement funding”, “non-recourse financial assistance” and “lawsuit funding loan”.
Why would you want one?
These types of loans are primarily focused on plaintiffs who were injured in an accident, and the injury has negatively affected their income. Common reasons to consider these loans are income replacement, mortgage & rent payments, hospital & medical bills, food & transportation expenses.
How Do They Work?
The companies that offer these loans will evaluate your personal injury case and the potential settlement or judgment expected in the case. The vast majority of these cases are settled with a monetary payment before ever going to trial. If the company thinks your case is good, they will offer you a cash advance on your expected settlement. In exchange, you agree to pay back the lender the principal, plus a funding fee. Most of the times, no advance re-payment is necessary.
It is also important to understand that this loan is NOT from your attorney. The lender will have to work with your attorney to understand the case, but the attorney is not allowed to loan you money. This obviously requires your consent. There is also a signed agreement between all three parties regarding the payout of future settlements. Most attorneys will try to dissuade a client from taking on this type of loan.
Understand the “Real Cost” of the Loan
These loans normally have a very steep fee associated with them, and sometimes the attorney fees + lender fees end up creating a situation where the plaintiff actually ends up owing more money than they received from the personal injury case. The injury loans all have a “funding fee” associated with them, that is accrued on a monthly basis. The fee is normally between 2% – 4% per month, which doesn’t sound like a lot, unless you do the math. When you consider that a lot of cases take many months to finally settle, the funding fees can often equate to an annual percentage rate anywhere from 27% to 60%.
Seek Alternative Loan Sources First
You should look at all sources before considering a lawsuit loan. Some other sources might be borrowing money from relatives & friends, disability payments, insurance proceeds, traditional installment loans from a local credit bureau, borrowing against the equity in your home or 401(k) account.
Understand the Most Critical Step BEFORE Getting a Lawsuit Loan
The most important thing before considering one of these loans is discussing it with your attorney. They understand the case and have your best interest in mind.
Here are some more resources on Personal Injury Lawsuit loans :