Will Lawsuit Loans Hurt My Credit?
Lawsuit loans are financial transactions that assign a portion of a future lawsuit settlement in exchange for immediate cash. We often are asked, “will applying for a lawsuit loan affect my credit?” In this post, we examine lawsuit loans and credit scores.
Traditional Loan Requirements
When someone is in a financial bind, they look for sources to provide support. Typical sources might include personal loans from family or friends, or loans from financial institutions.
Traditional loans normally require collateral that is “secured” by the lender. The security ensures the lender can repossess the collateral and sell it if the borrower defaults. Common secured transactions which provide financial liquidity include pay-day loans or mortgage cash out refinances.
Whether the loan is secured or unsecured (credit card cash advance), lenders underwrite the prospect of repayment through a variety of mechanisms. These are used as an attempt to determine the “creditworthiness” of a particular borrower. One such mechanism is the credit score.
A credit score is calculated by different companies and used by lenders to predict how likely a borrower will repay a loan on time. The score is generally calculated through analysis of a borrower’s payment history, the current level of indebtedness, types of credit used, length of credit history, and new credit accounts, among other factors.
It is important to note that traditional loans imply repayment (with interest) at some point in the future.
Lawsuit Loans – A Different Type of Transaction
Analyzing lawsuit loans and credit scores means examining lawsuit loans in general. Also known as settlement loans or lawsuit funding, lawsuit loans provide immediate financial support to plaintiffs while they endure a sometimes long and drawn-out litigation process.
Instead of using the lawsuit as collateral, a lawsuit loan is structured as a partial assignment of future settlement proceeds. In other words, the plaintiff sells a part of the settlement ahead of time. In return, he/she pledges a portion of the recovery when the case is resolved. The repayment amount depends upon the duration of the case and increases over time.
Most importantly, lawsuit loans are not repaid if the case is unsuccessful. This is significant because by making repayment contingent upon a successful outcome, lawsuit loans are not actually loans at all! Remember, traditional loans imply the loan amount and interest will be repaid at some point in the future. Lawsuit loans are clearly a different type of financial transaction.
If You Have Any Questions, Call 888-964-2224
Lawsuit Loans and Credit Scores
Since lawsuit loans are an advance on future property rights and NOT an extension of credit, credit scores have no place in the underwriting of lawsuit loans by funding companies. Other credit factors such as asset checks, employment history, etc. also have no bearing on the ability of plaintiffs to secure lawsuit funding prior to settlement.
No Reporting to Credit Agencies
In order for credit rating agencies such as Equifax, TransUnion and others to maintain their effectiveness, lenders must agree to report credit score data for analysis. Lenders report missed payments, credit balances, etc. to the agencies who in turn, publish the data and credit scores to other lenders. In this way, all subscribing lenders have access to the credit scores of new credit applicants.
With lawsuit loans, credit is basically irrelevant since lawsuit loans are not loans. Because the deals are structured as a future asset sale, lawsuit loans are non-recourse. This means that under the contract, the sole source of repayment is the lawsuit proceeds. Moreover, a lawsuit lender cannot pursue a plaintiff personally for repayment. Thus, lawsuit loan companies do not report “lost” investments to credit agencies.
No Credit Search for Lawsuit Loan Applications
Traditional lenders respond to new applications by running a credit search on the applicant. Lenders, landlords and potential employers have the ability to request access to your credit file, which includes your credit history, and these credit inquiries help them to get a quick overview of whether you’ve been using credit responsibly.
Each inquiry affects the applicant’s credit score, with multiple inquiries in a short time span lowering a credit score depending on the type of credit sought. Applicants for multiple credit cards for example, can see a drop in their score simply from an increase in “hard” inquiries.
Lawsuit loan applicants need not worry about “dings” on their credit history because lawsuit lenders do not generally run credit searches on their clients. Remember, repayment is entirely dependent upon the lawsuit’s outcome. There are no periodic payments nor is the plaintiff personally liable for repayment.
Credit Scores Not Important for Lawsuit Loans
As you can see, lawsuit loan design makes credit scores and credit history essentially irrelevant. Because lawsuit loans are a sale of a potential future asset, the “borrower’s” ability to make payments is not a concern for lawsuit funding companies.
What Are Lawsuit Loan Companies Concerned About?
If credit is not important, how can lawsuit lenders evaluate the risk of non-payment? The answer is through the lawsuit itself. Lawsuit loan approvals are based upon analysis of a lawsuit’s success probability. This generally includes an examination of liability, damages and ability of a defendant to pay these damages in any particular case.
Lawsuit Loan and Credit Takeaways
We hope this post clarifies the relationship between lawsuit loans and a plaintiff’s credit. Remember, lawsuit loan repayment is solely based upon a successful outcome. Learning how lawsuit funding works means understanding that credit scores, employment history, asset searches or any factor representing a borrower’s ability to make payments is not examined.
Thank you for your interest in the lawsuit funding business.