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Lawsuit loans have advantages and disadvantages
Filing a personal injury lawsuit can be expensive and time consuming. If you've filed a lawsuit and need money, a pre-settlement lawsuit loan might be a good option.
Risk free lawsuit loans—offered by a number of providers—work by advancing money to individuals who have filed personal injury lawsuits in exchange for the promise that they repay the loan (plus interest and any other applicable costs) out of the proceeds from their suit.
How lawsuit loans work
To be eligible for a lawsuit loan, you first have to file a lawsuit. Once the lawsuit is filed, you can fill out an application for a lawsuit loan from a lending company. The lending company will contact your attorney and evaluate your case.
Because lawsuit loans are "no risk" (meaning you don't have to pay back the loan back if you lose your case), the lender needs to carefully examine your claim to make sure they like your chances of recovery.
When obtaining a lawsuit loan, you generally can't borrow against the whole amount. For example, if you have a personal injury case that's worth $100,000, the lawyer will generally take 1/3 in attorneys' fees ($33,000) and there will usually be some medical liens (say, $20,000 worth). Most lenders won't lend you the full estimated value of the case ($100,000). Rather, the loan will be made against the portion the lender believes you will receive ($47,000).
If the lender approves the loan, the money is provided to you almost immediately (usually within 24—48 hours).
Once you recover proceeds from your lawsuit (either through a settlement or judgment), you'll have to pay the lender the principal amount of the loan plus any interest and fees (discussed in greater detail below).
Another way to think about lawsuit loans is that a lending company is buying a portion of your future settlement proceeds.
Advantages of lawsuit loans
The biggest advantage of a lawsuit loan is that it puts money in your pocket almost immediately.
Personal injury victims often face mounting medical and legal bills following an accident. Sometimes, their injuries lead to depression and strained relationships, which can create additional financial burdens. On top of all this, personal injury victims may be out of work and struggling just to meet their normal financial obligations.
Because of this compromised position, a lawsuit loan can serve as a much needed financial lifeline.
A reputable lawsuit loan is "risk free." This means you don't have to pay back the loan if you don't recover money from your lawsuit. This differs significantly from more traditional loans, which must be paid back in full regardless of what happens after the loan is made.
In fact, some lenders argue that lawsuit loans aren't even technically loans because they don't need to be paid back if the plaintiff doesn't win or settle their case.
Additional time to negotiate
Personal injury lawsuits often settle quickly because the injured plaintiff desperately needs money to meet their financial obligations and cannot afford to let the lawsuit drag on. Unfortunately, a well-counseled defendant understands this weakened position and too often makes a lowball offer, knowing the plaintiff will be tempted to accept it out of desperation.
A lawsuit loan strengthens a plaintiff's bargaining position by providing a means to take care of their bills so they can reject the lowball offer, dig in their heels, and take the time to negotiate a better settlement — or take the case to trial if necessary.
Disadvantages of lawsuit loans
Lawsuit loans can be expensive
The biggest disadvantage of lawsuit loans is the high cost associated with them.
Remember, lending companies don't get reimbursed if the plaintiff receiving the loan doesn't win their case or settle. Because of this risk, lending companies need to charge interest and other fees (such as application fees) to make sure they're profitable at the end of the day.
You may not qualify
Another consequence of lenders only being repaid if the plaintiff is successful is that lenders will scrutinize your case. If the chances of success in your case are low, you might have trouble obtaining a loan.
Lack of regulation
Most consumer credit loans (such as student loans, mortgages, and credit cards) are regulated by the state and the federal government. These regulations generally address two things:
- The amount of interest a lender can charge
- The information that must be disclosed (and how that information must be disclosed)
Lawsuit loans are not regulated like most consumer credit loans. As a result, interest rates can be high (in extreme cases, as high as 124%) and the terms regarding the loans can be unclear or deceptive.
Some things to keep in mind
Lawsuit loans can be a good option because they offer a financial lifeline while you attempt to settle your case. But lawsuit loans have some risks. Keep the following tips in mind when shopping for a lawsuit loan:
- Ask about application fees
- Ask about interest rates (including whether the interest is compounded)
- Make sure the lender provides you with the loan terms in writing
- Involve your attorney in the choice of lending company
If you're considering a lawsuit loan, use our free online directory to locate an attorney who can help steer you in the right direction.
See our guide Choosing a personal injury attorney.