Personal Injury Loans – Purpose, Uses, Costs and Other Facts
Personal injury loans are agreements between a lawsuit loan company and a personal injury plaintiff who exchange immediate cash for a portion of the future proceeds of a case. Since these financial agreements often involve personal injury claims, exchange money between the parties, and repayment is calculated by a percentage rate over time, they are often referred to as personal injury loans.
There is some controversy surrounding personal injury loans. Opponents point to the costs associated with this type of transaction. Proponents simply state they are providing liquidity to an otherwise illiquid potential asset. They assert the parties themselves should determine what is “fair” under the circumstances.
In this article, we examine personal injury loans – what need they aim to fill, how they are structured to meet this need, discuss criticism, and define the current landscape of the personal injury loan landscape.
The Need for Personal Injury Lawsuit Loans
Legal funding businesses offer personal injury loans to personal injury plaintiffs who often need an influx of cash to meet immediate financial needs. Pre-settlement injury loans allow injured parties, often unable to earn as much as they did prior to the injury, to meet their financial obligations. Personal injury loans are also known as legal funding or lawsuit funding and they simply aim to solve cash flow issues that may arise during the litigation process. Personal injury plaintiffs look for personal injury loans because they have often exhausted all other options.
As many plaintiffs will attest, pursuing a lawsuit is difficult. Filing a personal injury lawsuit means you are suing a financially strong insurance company which retains a team of defense lawyers. Even though the case is strong, defending the case is part of the adversarial legal system. Because the cases take time, and many plaintiffs are simply not able to earn as much as before the accident, many are forced to accept “low-ball” settlement amounts simply to relieve the pressure. Personal injury loans solve this dilemma.
In some jurisdictions, attorneys are able to advance money to their clients. Usually the transaction is “interest-free”. Still, many attorneys are often reluctant to advance more money on the file. After all, they are working on a contingency fee arrangement and are already advancing their time and monetary costs associated with litigating the matter.
In the majority of other states, attorneys are prohibited by ethical rules to advance money to clients.
With personal injury lawsuit funding, plaintiffs get cash now, exactly when they need it. Better still, they can spend the money exactly as they want to without any restriction. Plaintiffs often use the lawsuit loan to pay bills, buy groceries, pay rent or mortgages, or even invest in a new business venture.
The medical aspect of many personal injury claims is often not covered by insurance. Plaintiffs also utilize personal injury legal funding to pay for medical treatment connected with their lawsuit. Once the case is resolved, the medical treatment is repaid, very often for less than otherwise would be owed.
In short, lawsuit loans are a flexible liquidity option for litigants in their time of need.
Personal Injury Lawsuit Loan Alternatives
Plaintiffs normally seek personal injury settlement funding when they’ve tried all other possibilities. Prior to applying, most clients have already asked friends and family for money, took a loan or refinanced their home, sold off unwanted or unneeded possessions, took loans on retirement plans or IRA’s, or used any other means to raise cash.
Personal injury loans are one of the last options available and while lawsuit loans can hedge against losing a lawsuit, many plaintiffs would rather avoid lawsuit loans until they’ve exhausted all other options.
Personal Injury Settlement Loan Uses
As was said previously, there are no restrictions on the use of personal injury lawsuit settlement loans. Despite the fact many plaintiffs use personal injury advances to pay for living expenses, some plaintiffs and their attorneys use lawsuit funding to enhance the settlement value of the case. For instance, a common practice is to use legal funding loans to pay expert fees at deposition or trial.
The use of surgical lawsuit funding is also common. In this application, personal injury loans pay for medical treatment when a medical insurance policy cannot be used to pay for the personal injury lawsuit loans procedure(s). Consider the following:
A person is injured when they slip and fall at a business and that accident results in serious injuries. Medical examinations show the need for surgery. The victim does not have medical insurance to cover the expenses. The client still needs the treatment, so he/she contacts a personal injury loan company to pay the surgeon directly. The legal funding company and the plaintiff enter into an agreement wherein the company will pay the medical providers on the day of surgery.
In this situation, everyone wins. The client gets the treatment he/she needs. The medical providers are paid in full and the attorney gets a potentially more valuable case to pursue.
Surgical funding is commonplace but there are no limits to the use of pre-settlement loans. Any expense which benefits the plaintiff directly or indirectly can easily be considered a worthwhile use of a personal injury loan.
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Personal Injury Loan Transaction Basics
Personal injury loan contracts advance cash now in exchange for a portion of the future proceeds of a lawsuit or insurance claim. The deal calculates repayment using a “use fee” which is calculated with a percentage rate. The ultimate repayment depends both on how long the case takes to resolve and whether the case is ultimately successful at settlement or trial.
Unlike a traditional loan which must be paid back at some point in the future, personal injury loans are only repaid if the case is successful. That is, if there is no recovery, the personal injury loan is not repaid. That is why pre-settlement funding loans are sometimes referred to as “non-recourse” funding because the funder has no ability to demand payment if the case is lost. Because of this, a personal injury loan is not really a loan at all!
Instead, personal injury loan transactions are actually a sale of property rights in the lawsuit. If the case is lost, then what was purchased no longer holds value. The plaintiff in this scenario is not obligated any further.
Attorneys Must Cooperate with Personal Injury Loan Applications, Processing and Repayment
Attorneys are an integral part of the personal injury pre-settlement loan process. Attorney cooperation is so important that no lawsuit funding contract will go forward without it.
Once an applicant is pre-qualified, the personal injury loan “lender” sends a correspondence (either fax or email) to the attorneys office. In some instances, applicants provide the paperwork directly. But most often, the attorney provides the necessary documentation. Moreover, having an attorney representing a client on a contingency fee arrangement is a pre-requisite for almost all lawsuit loan processing.
Once approved and an offer is made, lawyers must then acknowledge the assignment and agree to repay the amount owed at the time of disbursement.
Personal Injury Legal Funding Loan Rates, Fees and Cost Calculation
Personal injury loans can be expensive. The cost is determined by processing fees and the use of a percentage rate in calculating the ultimate repayment based on time. Some lawsuit loan companies call the calculation a “use fee” and not “interest” but the cost is still calculated based on the time of funding and repayment. It is important to note that there are no payments on a typical personal injury loan until the case is resolved or the advance is repaid in full prior to settlement. That is, the client cannot “pay down” the pre-settlement loan to avoid the cost.
Personal Injury Settlement Loan Rate Structures
Lawsuit settlement funding loan companies employ two different calculation methods when it comes to lawsuit loan rates. The first type charges a monthly percentage rate on the contract amount and then charges that same rate (e.g. 3%) on the balance the next month and so on. Because this calculation charges interest on the balance and not only the original contract amount, these types of contracts are known as “compounding” monthly funding agreements.
The second type of personal injury pre-settlement loan rate structure charges a percentage rate on the original contract amount every 6 months (e.g. 18%). This “non-compounding” rate structure is also known as a “simple” interest” funding contract.
The comparison between the two is normally minimal. Yet the differences can be substantial for cases which last many years. In general, the difference is as follows:
Compounding rate payoffs are generally less in the first six months. After six months, but before 2 years elapses, there is little difference between the two. After two years, compounding repayment amounts are generally larger than simple interest calculations.
Lawsuit loan rate comparisons can be a great source of information. You can also use a lawsuit loan payoff calculator and define your own terms. The real difference in cost can be seen after 2 years post contract.
Personal Injury Loan Repayment Examples
Pre-settlement funding loans normally calculate repayment in 6-month increments. If the matter is resolved at any point within that time frame, the repayment is a set amount. For example, a $10,000 advance is signed and funded on March 3rd of the current year. The contract calculates repayment by charging 18% every six months – simple interest. In November, the case settles. The repayment is $13,600 because the case was settled between 6 and 12 months.
The payoff remains the same throughout the entire 6-month period in the above example. It does not affect the payoff whether the payment is made in the 8th or 11th month.
In addition, the personal injury loan is satisfied if paid in full. As previously mentioned, partial payments are generally not accepted.
Personal Injury Loan Critics
Much of the media coverage opposing personal injury loans comes from those defending negligence claims. Some of these parties point to costs and fees that are “outrageous” in their opinion. They preach that personal injury loan contracts are oppressive and are predatory lending in substance. Thus, they stress the need to regulate or outright ban the use of personal injury loans for these unsuspecting clients’ own “protection”. Attacks classify pre-settlement funding as traditional loans and since terms are more expensive, critics argue these contracts violate established usury laws.
Of course, we already discussed why personal injury loans are not traditional loans. But that does not stop the critics – who are often just proxies for insurance companies whose job it is to minimize payouts and maximize shareholder profits.
It is not surprising insurers, who can use the legal system to influence outcomes using their financial leverage over plaintiffs, would be the biggest critics of personal injury loan usage. The time it takes to litigate a personal injury case is the very reason personal injury funding exists.
Of course, litigation delays are not entirely the result of insurance company defense tactics. The civil court system backlog in many urban jurisdictions is substantial. Still, insurance companies benefit from this delay because the longer cases drag on, the more likely a financially stressed plaintiff will accept a less than adequate settlement offer.
Personal injury loan critics are entitled to voice their opinion. Yet the fact still remains: plaintiffs use pre-settlement funding loans to bridge the financial gap which sometimes occurs between filing a claim or lawsuit and the time it is ultimately resolved. Calls for tort reform can always be heard but the success of the lawsuit funding industry shows a legitimate need is being filled in the marketplace.
Legal Funding Loan Champions
Personal injury loan companies can simply point to the growth of their marketplace to illustrate that a viable need is being met. If clients didn’t see the value, lawsuit funding would not exist. These free market arguments usually fall on deaf ears with interventionists, do-gooders and regulators so the industry must also defend against each attack.
In response to “fairness” arguments, personal injury loan proponents point to most companies following of the industry’s best practices as outlined by the Attorney General of the State of New York. Several years ago, lawsuit loan companies themselves worked diligently with then NY State Attorney General, Eliot Spitzer, to create guidelines for funding companies to follow.
Best practices mandate all contracts contain a disclosure statement which:
- States the total amount to be advanced to the consumer;
- Itemizes one-time fees, broken out item by item (e.g. application, processing, attorney review, broker, etc.);
- States the percentage fee or rate of return, stated on an annualized basis, including frequency of compounding;
- States the total amount to be repaid by the consumer, broken out by six-month intervals, carried forward to 36 months, and including all fees as well as any minimum required payment amount.
The guidelines also allow a 5 day right of rescission to clients among other safeguards.
Injury loan advocates used these guidelines as proof they are not out to cheat anyone and are simply offering a service to plaintiffs who need it. Their participation in the drafting of these “rules” shows they are offering solutions in an open and honest manner. These proactive efforts legitimize personal injury loans.
The Personal Injury Loan Industry Today
The personal injury loan business is always changing along with the needs of its customers/clients. Most of lawsuit loan business involves personal injury cases, case loans and attorney funding for larger and more involved litigation has also risen. Some lawsuit funding companies are financing the costs associated with major mass tort litigation such as trans-vaginal mesh and other product liability lawsuits. Large law firms utilize law firm non-recourse funding to finance their operations because larger lawsuits involve large corporate defendants and often hundreds if not, thousands of clients. By financing case costs over time, case funding allows plaintiffs the opportunity to access the legal system and pursue justice.
Lawsuit Loan Case Law
Decisions involving lawsuit loans disallow the classification of these transactions as traditional loans. Most state usury laws limit the amount of interest a lender of traditional loans can charge a client. Applying usury laws to personal injury loans would mean the inability of lawsuit lenders to profit from the enterprise. Simply put, if lawsuit loans are classified as traditional loans, most personal injury loan companies would be out of business.
In Ruth v. Cherokee Funding, Cherokee advanced money to their client, Ruth at 4.99% per month. At the time of settlement, Ruth’s attorneys refused to pay stating the agreement violated certain laws in the state of Georgia. The Georgia Supreme Court found: “The provision of funds under an agreement that imposes only an uncertain and contingent repayment obligation is not a ‘loan’… such a transaction is better characterized as an ‘investment contract.’”
Similarly, in December, 2018, the New York Appellate Court found in Cash4cases v. Burnetti: “Although the interest rate was high, given the contingent nature of the transaction, the agreement was not overly unfavorable to defendant.”
Many states repeatedly hold that lawsuit funding contracts are not loans. Others states have outlawed the practice altogether.
Types of Cases Which Qualify for Personal Injury Loans
The following types of cases are routinely advanced money prior to settlement:
- Auto Accidents
- Slip/Trip and Fall Cases
- Workers’ Compensation (Workers’ Comp)
- Dog Bites
- FELA (Railroad Workers)
- Jones Act (Maritime Injury)
- Medical Malpractice Lawsuit Loans
- Nursing Home Negligence
- Product Liability
- Wrongful Death
- And more . . .
By far the most common personal injury loan involves auto accident lawsuit loans. Liability in these cases are easy to prove; damages likewise through medical records; and available insurance coverage make these cases the “bread and butter” of the personal injury loan business. Premises liability lawsuit loans where a person is injured to negligence of a property owner or other party who breached a duty of care are also common.
Personal injury loan approvals depend on a multitude of underwriting factors such as the cases venue (state and county), case type, attorney reputation, availability of documents, insurance coverage, stage of proceedings and host of other factors.
One universal lawsuit loan requirement is that the plaintiff must be represented by counsel. As stated previously, without the presence of the attorney, there is no lawsuit funding.
Help with Lawsuit Loans
As you can see, personal injury pre-settlement funding fills a legitimate need in the marketplace. As such, they have become a legitimate part of personal injury legal practice.
Use lawsuit loans to pay for living expenses, case costs, medical care or any other need. When financial strain forces you to consider accepting less than you deserve, don’t wait – call Fair Rate and let us help you.