The law gives a person injured through the negligent or reckless behavior of another party the right to file a personal injury lawsuit to recover damages. It can take years for a lawsuit to make its way through the courts. While waiting for a settlement or jury verdict awarding them damages, plaintiffs must deal with financial stress caused by being out of work while medical bills and other day-to-day expenses go unpaid.
Financial stress may cause plaintiffs to jump at the opportunity for a quick settlement for far less than their claim is worth simply to get out of debt. Insurance companies know this and use it as a tactic to take advantage of a situation that was created by their own insured.
A lawsuit loan offers you a chance to get the cash needed to cover living expenses and other debts to give your attorney time to fight to obtain the maximum settlement available under the law. The cash advance does not get repaid until the case ends in your favor and, depending on the terms of the lawsuit loan, you owe nothing in the event you lose the case.
As good as it may sound to get a cash advance against the settlement or judgment that you win, lawsuit funding companies are in business to earn a profit by charging a fee or interest for their services. Avoid unpleasant surprises when a large portion of your settlement is taken to repay a cash advance and the interest or fees charged by the settlement funding company by learning the methods used to determine how much a lawsuit loan will cost.
What is a lawsuit loan?
A lawsuit loan is a cash advance given against the future proceeds the plaintiff in a pending lawsuit anticipates receiving either through a settlement or a judgment based on a verdict after trial. Lawsuit loans go by a number of different names, including:
- Settlement advance
- Settlement funding
- Litigation funding
- Litigation financing
- Lawsuit cash advance
- Lawsuit funding
Although they are generally associated with personal injury cases, lawsuit funding is available in any type of civil lawsuit in which the relief granted to the plaintiff by the court or by a panel of jurors is money damages, including:
- Breach of contract
- Civil rights violations
- Labor law, including wrongful termination
- Class actions
- Securities fraud
- Wrongful imprisonment
The company you apply to for lawsuit funding evaluates your case to determine its value and the likelihood that you will win. Your creditworthiness or assets that you own are irrelevant because settlement funding companies rely only on the strength and value of the case in making their decision to approve you for a cash advance.
Although people refer to them as loans, there are some distinct differences between a cash advance from one of the settlement funding companies and money borrowed from a bank. The bank expects you to repay the debt plus interest in addition to any upfront fees, such as an application fee, it charges you for the loan. The bank looks to you, the borrower, for repayment.
Lawsuit loans are really not loans in the traditional sense of a lender looking to a borrower for repayment. Lawsuit funding provides you with a non-recourse advance, which means the funding company does not look to you for payment. Instead, you assign it an interest in the litigation with the right to be the first one paid from insurance proceeds or other money you receive through settlement or trial of your lawsuit.
How are lawsuit loan fees calculated?
A lack of legislation at the federal or state levels has left the lawsuit settlement loan industry relatively unregulated. Only about 20% of the states have legislation imposing disclosure requirements and caps on interest rates charged by companies offering pre-settlement funding services within their jurisdictions. As a result, each company is free to set its own terms, including costs and fees, on a lawsuit settlement loan.
As a general rule, companies offering litigation loans charge upfront fees, such as origination fees and application fees as you might pay to borrow money from a bank. Before applying, ask the lender to explain in detail all charged fees, including the amount of each one. Also, ask whether interest will be charged on the fees. Review the information that you get with your lawyer.
To calculate the cost of lawsuit loans, you need to know the following things:
- Amount of the advance
- Type of interest – is it compound or simple?
- Interest rate
- How long it takes to settle the case
- All fees including: application fees, processing fees, underwriting and review fees, origination fees and delivery fees
We will break down the math briefly here, but keep in mind that our lawsuit loan calculator can do it all for you
The more money you receive as a cash advance and the longer it takes to repay it increases the cost to you because of the interest charged by the company.
Simple interest is calculated by multiplying the amount of the cash advance by the annual rate of interest and multiplying the result by the time from the advance until it is repaid. For example, assume the money you need to pay rent and medical bills, buy groceries, and cover other living expenses is $20,000. A legal funding company offers it to you at a monthly rate of 4% simple interest.
If it takes 18 months to settle the case, you would owe the legal funding company $34,400 from the settlement proceeds. Here is the calculation to determine how much interest you would owe: $20,000 x .04 x 18 = $14,400. The deduction from the settlement would be the advance of $20,000 plus $14,400 in interest for a total of $34,400.
Compound interest results in owing more to the lawsuit loan company than would be owed with simple interest. Using the $20,000 advance from the previous example at 4% a month, you would owe $20,516.33 in interest at the end of 18 months resulting in $40,516.33 paid to the lawsuit loan company from settlement proceeds. The reason you owe so much in interest is that you paid interest both on principal and accumulated interest for 18 months.
Can I borrow money from my lawyer?
In most states, borrowing money from your lawyer is not an option when you need assistance to pay medical bills and living expenses. The Model Rules of Professional Conduct of the American Bar Association prohibit attorneys from providing financial assistance to a client other than advancing costs and other expenses of the litigation, such as court fees and expenses related to medical examinations and reports needed as evidence in the case. Click here and choose your state of residence to see whether or not this is an option in your state.
Can my lawyer deny me from getting a lawsuit loan?
The consent or permission of your lawyer is not required for you to apply for and obtain a pre-settlement loan, but most companies require their signature to finalize the transaction. Also, the company needs documents and information about your case in order to evaluate it and make a decision whether or not to approve the advance. An uncooperative lawyer could stand in the way.
Your attorney may be looking out for your best interests. The attorney may believe the terms of the lawsuit loan are not favorable or that the case is not far enough along for a company to evaluate it to determine its value or likelihood of a settlement.
How to find a lawsuit loan lender
When it comes to finding a lawsuit loan company, there are a few good options:
- We at Compare Lawsuit Loans provide comprehensive reviews of dozens of the best lawsuit loan companies.
- The attorney handling the case for you may be your best resource when searching for a lawsuit loan company.
- Another option may be the American Legal Finance Association or ALFA, which is a trade organization for the legal funding industry. ALFA members agree to maintain specific standards and claim to adhere to fair business practices.
What to know as you shop around for the best lawsuit loan terms
Just as you research the best quote for insurance by comparing rates and terms offered by different companies, you need to do the same thing when shopping around for the best lawsuit loan terms. Some of the key points you want to gain from talking with each settlement funding company include:
- The interest rate charged and whether it is simple or compound.
- If the company charges compound interest make certain to ask whether it is compounded daily, weekly, monthly or at some other interval.
- Ask for a written breakdown of fees charged in addition to interest.
- Ask them to confirm that repayment of the advance and all fees will not be due until settlement of the lawsuit and that nothing is owed in case you do not win.
You only want to consider settlement funding companies that are not hesitant about providing you with easy-to-understand information about their services.
The temptation to get money without having to pay it back until your lawsuit is settled can lead you to make poor choices. Whatever you think you want to do, consult with and follow the advice and guidance of your lawyer before making a decision to sign an agreement accepting a lawsuit loan.