Case loan cost questions arise daily in the lawsuit funding business. We field this question dozen of times each day. Often, customers are surprised at the “cost” of a case loan, since the charges are usually more than a car loan or mortgage note. This post will attempt to answer this question in a little more detail.
The pre-settlement cash advance or “case loan” is a unique investment. As investments are concerned, the case loan represents an opportunity to help plaintiffs who are involved in litigation pay some or all of their bills while waiting for their lawsuit to come to a
conclusion. Wherever there is a need to be filled, you will find individuals embracing strategies to fill that need. This is the essence of the entrepreneurial spirit. But the opportunity available to investors in the lawsuit funding cash advance business is really no different than in any other business in that there are still costs associated with providing the service.
Potential clients often complain about the cost of a case loan as compared to mortgage rates or car loans. Yet, case loan cost really just represents the cost of doing business for profit. And the reasons for this are plentiful.
One such reason is the cost of acquisition. 15 years ago, when the lawsuit funding business just got started, case loan cost was actually higher. Indeed, settlement loan companies charged exorbitant rates for advances. It is fair to say the rates actually lowered over time. And this is as it should be because more and more historical data is available from which to assess the risks. Before this data was available, investors were essentially ‘flying blind’ in an investment without any history of return.
While case loan cost is lower than in years past, the average lawsuit cash advance funding still commands a return greater than a car or home loan. However, the risks are not the same.
First, financing for a car loan and a case loan are different. With a car loan, the lender can collect on the loan in the event payment is not made. For example, the lender can attach a “claim” against any asset the client might own. Another remedy available to an auto lender is to repossess the vehicle to mitigate losses.
A case loan however, is “non-recourse” in that if there is no recovery on the lawsuit, the advance is not repaid and the lawsuit loan company loses the money it advanced to the plaintiff. Technically, the lawsuit funding company purchases a portion of the proceeds of the claim. If the claim should prove to be worthless, the investment is lost and the “lender” has NO claim against the plaintiff for repayment.
The lawsuit funding business is evolving. Like any business, the more it evolves, the more efficient it becomes. Because of competition, this efficiency manifests itself in pricing. The savings are ultimately passed on to the client. For these reasons, case loan cost, although still more expensive than a car or home loan, has decreased over the last 15 years, making this type of financing a viable option for plaintiffs in a liquidity crunch.
Thank you for your interest in case loan cost and in the lawsuit funding business.