Recourse Funding vs. Traditional Loans

Non-recourse funding provides plaintiffs the ability to tap into the expected recovery from civil lawsuits. There are distinct differences between non-recourse funding and traditional methods of obtaining cash. In this post, we examine the fundamental structure of non-recourse funding and compare these specialty financial services to traditional funding models.

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Traditional Loans

Traditional loans are financing options offered by established financial institutions, like banks and credit unions. They are based on standard qualifying criteria such as credit scores, income and asset verification, and employment status. Examples range from personal loans for individual use to various types of mortgages for home purchases. 

Secured Loans

Loans secured by collateral are very common. Borrowers pledge something of value (collateral), and lenders offer cash in return. A common practice is for borrowers to make periodic payments over time. As part of the deal, lenders can obtain interest in the collateral if borrowers fail to make payments.

Mortgages are a common type of traditional loan and are used to finance the purchase of real estate. The property itself serves as collateral in these transactions. 

Auto loans, business loans and home equity loans are other types of secured loans.

Personal loans

Personal loans can be used for a wide variety of personal expenses and include unsecured and secured varieties. Unsecured personal loans are the most common type of personal loan. They do not require collateral. Instead, borrowers are approved based on a borrower’s credit history and income. A common example is credit card cash advances and purchases.

Secured loans require pledged collateral in which a lender retains an interest. Examples of secured personal loans include car loans or personal loans where savings or investment accounts are pledged.

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Non-Recourse Funding

Non-recourse funding means the lender has no recourse against the borrower personally for repayment. Instead, repayment depends upon the collateral itself. An example of this can be commercial real estate loans where the property can be seized after default. Unlike secured and unsecured personal loans, personal assets such as bank, investment or other assets cannot be obtained.

Non-Recourse Funding is Riskier for Lenders

Due to the limited remedies available in the event of a default, non-recourse loans are generally more difficult to obtain and may come with higher interest rates than recourse loans. Lenders often require excellent credit and strong financial profiles from borrowers.

Further, borrowers can expect higher down payments in many circumstances. Lenders generally require a higher loan to value ratio than with secured transactions.

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Lawsuit Loans are NOT Traditional Non-Recourse Funding

Lawsuit loans are not your typical non-recourse funding. Like described above, typical non-recourse funding involves the pledging of collateral as security for a debt and the lender cannot pursue any more than the collateral in the event of default.

Lawsuit loans however, are not structured as loans at all. Instead, they are a partial sale of future proceeds in a lawsuit. This may seem at first glance like a distinction without a difference. However, it is an important one.

Pricing Affects Lawsuit Loan Structure

Unlike a commercial property, which is a tangible asset, lawsuit loans are “collateralized” from an intangible asset. That is, the lawsuit recovery is not guaranteed. Although lawsuit loans are non-recourse in the sense no repayment is required if a recovery does not materialize, repayment IS dependent upon a contingent outcome, one that does not yet exist.

Lawsuit loan lenders take on additional risk in this regard. Thus, this additional risk must be reflected in the transactions’ structure.

Usury Laws and Lawsuit Loans

Structuring lawsuit loans as a transfer of property rights takes these transactions outside the realm of “lending” and into the sale of property. Since any price can be agreed upon between buyers and sellers of property, usury laws (state lending laws which limit the amount of interest that can be charged) are not applicable.

This is important because without the ability to price lawsuit loan rates at their current level, lawsuit funding enterprises would not be able to turn a profit. Thus, the lawsuit loan business would simply not exist. And that would be a shame because many plaintiffs utilize this market to fund their immediate concerns, whatever they might be.

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Lawsuit Loans – Specialty Non-Recourse Funding

Plaintiffs use lawsuit loans in a myriad of ways. These include:

• Medical treatment and surgery loans
• Living expenses
• Housing
• Transportation
• Past debts
• School tuition
• and more . . .

These specialty financial products serve as a lifeline for plaintiffs who need immediate cash. Because they are advances on a future recovery, the money is theirs to use at their discretion. There are no restrictions whatsoever in most lawsuit loan contracts.

Lawsuit loan amounts can differ greatly and are dependent upon the lawsuit’s expected future recovery. Some factors lawsuit loan underwriters use to make this determination are:

• The likely settlement value
• The expected duration of the case
• Available insurance coverage
• Amount of damages caused
• The likelihood of success

Why Choose Fair Rate Funding

You obviously have a choice in who you use for legal funding. We offer:

• Simple and Easy Process – Approval only on the strength of your case.
• Risk – Free Proposition – Only repay if you win your case.
• Rapid Approval and Funding – Approvals often within 24 hrs.
• Up Front Pricing – Absolutely no hidden fees.

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