Examining the Pros and Cons of Settlement Loans
In this article, we will explore the pros and cons of lawsuit settlement loans. We examine the benefits and drawbacks of pre-settlement funding and offer advice on when to consider lawsuit loans as a financial support option.
What are Settlement Loans?
Settlement loans can be described as specialty financial transactions that provide immediate cash to litigants who need money while they wait for a civil lawsuit to conclude. The settlement loan business purchases a portion of the prospective lawsuit proceeds ahead of time. The plaintiff gets financial support quickly. The business gets a return on its investment if the case is successful.
Why are Settlement Loans Popular?
Settlement loans arose from many plaintiffs’ need for cash while waiting for their cases to settle. This was particularly true for personal injury plaintiffs who were no longer able to work because of their physical limitations. Since lawsuits take time, many were unable to pay simple living expenses and were forced to accept “low-ball” settlement offers as a result.
In some states, personal injury attorneys are able to advance money to clients in anticipation of settlement. In others, state ethics rules prohibit the practice. Regardless of the jurisdiction, plaintiffs need this financial support. The purpose of settlement loans is to fill this need.
Pre-Settlement Loans – The Pros
Lawsuit settlement loans offer several benefits for plaintiffs, these include:
Immediate Financial Support
Struggling plaintiffs need cash fast. With settlement loans, plaintiffs get immediate cash to pay for any type of expenditure. This is probably the most important settlement loan “pro” – the speed in which plaintiffs can secure relief.
The settlement loan process is simple. Clients first apply with a phone call or a contact form. A lawsuit lender contacts the plaintiff to discuss the case. Once “pre-qualified”, and with the plaintiffs’ permission, their lawyers are contacted to get everyone on the same page in terms of expectations, etc. Once approved, a contract is forwarded for plaintiffs’ and attorneys’ signature.
When executed agreements are received, plaintiffs are forwarded cash via electronic bank transfer or check via overnight courier. Thus, a major settlement loan pro is the immediate access to funds. Plaintiffs can have money in their accounts in as little as 12 to 24 hours.
Money is Restriction Free
Another settlement loan pro is flexibility. Plaintiffs can use settlement loans in any way they wish. There are absolutely no restrictions on how the money is spent. Most plaintiffs use settlement loans to pay for living expenses such as:
- rent or mortgage payments
- school tuition
- medical bills
- medical treatment
- legal fees
- back taxes or debts
No restrictions give settlement loans an advantage over other types of traditional loans which require the money to be spent on certain items, such as car or school loans. This flexibility can be a significant “pro” when comparing different financing types.
Settlement Loans are Non-Recourse
Settlement loans are not really loans in the traditional sense of the word. Instead, they are referred to as non-recourse funding. Since the transaction is structured as an advanced purchase of a future settlement, the lawsuit proceeds are the sole source of repayment under the contract. This means two very important things. First, the advance is ONLY repaid if the case is successful. Second, plaintiff is not personally liable for the advance.
The above are valuable pros when discussing settlement loans since they protect plaintiffs in the event lawsuits are lost. With settlement loans, plaintiffs can pursue their case with ease of mind since they cannot be held personally responsible for the loan.
Credit Scores Don’t Matter
Also unlike traditional loans, lawsuit funding does not require a credit check. Again, there is no personal repayment of a settlement loan. Nor are periodic payments required. Therefore, credit history is irrelevant.
The settlement loan “pro” then, is that plaintiffs with poor credit scores can still get relief. Settlement funding companies base their decision solely on the facts surrounding the lawsuit. Plaintiffs who can’t access other forms of credit can find financial support through settlement loans.
Collateral Not Needed
Another settlement loan pro is that no collateral is needed other than the lawsuit itself. Traditional loans, such as car loans or mortgages, require collateral as security. If the borrower defaults, the creditor can take the collateral as full or partial repayment. Since pre-settlement loans are only repaid by the lawsuit itself, plaintiffs do not have to risk their other assets. This can be a significant benefit in certain situations.
Settlement Loan Pro – a Heavier Case
In certain instances, lawsuit loans strengthen a lawsuit and demand higher settlement amounts.
Consider a personal injury lawsuit loan which is used to get much needed medical treatment. Sometimes referred to as surgical funding, lawsuit loans allow surgical treatment when no insurance coverage is available to pay for the procedure(s). More treatment usually means larger settlements so this settlement loan pro helps give more settlement value to a particular lawsuit.
Settlement Loans Give Attorneys Time
Because settlement loans relieve financial strain, plaintiffs are less likely to pressure their attorneys for a quicker settlement. Plaintiff attorneys can use their skills to negotiate the best possible settlement – free from knowing their clients are in dire need of funds.
The legal system has finite resources. Cases are usually heard loosely in the order in which they are filed. Plaintiff attorneys can be patient as they apply their craft. This usually results in a higher recovery than would otherwise be available.
The Cons of Lawsuit Settlement Loans
Some aspects of settlement loans are not all that positive. Below are some settlement loan cons.
Settlement Loan Cost
One often cited settlement loan disadvantage (con) is that they can get expensive, especially if a lawsuit goes on longer than expected. Lawsuit funding investments are high risk. Higher risk means the cost to consumers must also reflect a larger risk of loss. Thus, interest rates and fees associated with settlement loans are often much higher than traditional loans.
Not All Lawsuits are Candidates for Case Loans
The good news is that if you have an attorney who is retained on a contingency fee arrangement (lawyer only gets a fee if successful), you will likely qualify for a settlement loan. However, many lawsuits are not candidates for funding. These can include:
- Landlord/tenant actions
- Social Security Disability claims
- Cases involving trusts and estates
- and others. . .
The vast majority of lawsuit funding involves personal injury loans. These include injuries sustained in car accidents, slip and falls, workplace accidents, product liability and other actions.
Pricing May Vary
Lawsuit funding is unregulated by the federal government. And although some calls for lawsuit loan regulation have been successful, many states still leave the industry alone. For this reason, few restrictions exist on how much lawsuit funding companies can charge for their services. Further, with the exception of some “best practices” suggestions from the New York State Attorney General’s Office, few requirements are codified as to how charges are calculated and funding terms disclosed.
Of course, an unregulated marketplace also has its advantages. For example, as more businesses entered into the market, competitive prices for quality cases has decreased. So the bad news is that companies can charge whatever they can get away with. The good news is that with a little research, it’s never been easier to find the best lawsuit loan company to serve your needs.
Some lawsuit funding companies have been accused of exploiting vulnerable plaintiffs and/or charging excessive interest rates and fees. Unfortunately, there are unscrupulous individuals in every business. Lawsuit funding is no different. Yet the predatory actions of certain entities should not taint the entire industry.
Like stated above, the settlement loan marketplace is largely unregulated. This is both a settlement loan pro and con. Fair pricing is available, you just have to look for it. Consider a company’s positive customer reviews before applying and make sure you read the contract thoroughly before signing. Protect yourself and you’ll be safe from predatory practices.
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Settlement Loan Pros and Cons Takeaways
Pre-settlement loans can be a helpful financial tool for plaintiffs. They are not without risk however so it would be prudent to weigh both settlement loan pros and cons before moving forward. It might also be helpful to consider other available funding options at your disposal. These might include:
- personal loans
- loans from family or friends
- mortgage cash-out refinancing
- retirement accounts
- and others. . .
Weighing the pros and cons of settlement loans should contain an evaluation of:
- When the case is likely to be resolved
- Your immediate financial needs
- Future financial obligations
- The reputation of the funding company
While accurately predicting when a case will settle is difficult, a ball park time frame can be considered when deciding to obtain a lawsuit loan. Using your attorney’s expertise can be helpful in this regard. In most cases, attorneys have experience in similar situations and can estimate a time frame based upon these experiences.
Choosing a reputable lawsuit loan company has never been easier. Most companies have an online presence and their reviews can be read and evaluated. Plaintiffs might consider what terms the company quotes online or when they are contacted. Considering a Better Business Profile and/or age of the business might also be prudent.
Settlement Loan Pros and Cons Conclusions
Generally, the best time for plaintiffs to consider a pre-settlement loan is after they’ve weighed the pros and cons, evaluated all available options and decide a settlement loan is in their best interest. Under these circumstances, plaintiffs can be sure they are making an informed decision based upon all available facts.
Thank you for your interest in settlement loan pros and cons and Fair Rate Funding.