Looking into Lawsuit Loan Cost
The lawsuit loan, also known as lawsuit funding or pre-settlement funding, is a unique investment. Its structure allows investors to assist plaintiffs in ongoing litigation with immediate cash to help pay their expenses while the lawsuit is litigated. This post analyzes lawsuit loan cost and helps identify the unique nature of these specialty finance products.
Lawsuit Loan Cost Reflect Cost of Production
Wherever there is a need, you will find entrepreneurs trying to fill that need. In any business, there are costs associated with providing the service or product. The lawsuit loan business is no different.
Occasionally, critics target the lawsuit loan industry as too expensive or predatory to those who are desperate for financial resources. Despite these claims against the cost of the lawsuit loan, lawsuit loan cost simply represents the cost of providing the service for profit. Lawsuit loan “rates” are certainly larger than mortgage rates or car loans. But major differences separate these types of monetary transactions. In truth, a lawsuit loan is far different than a car loan or a mortgage – regardless of the use of the word “loan”.
Lawsuit Loan is a Misnomer
The term “loan” implies repayment at some point in the future. Car loans, home loans, and others are “secured” by collateral. That is, the car or home can be “repossessed” and sold by the lender to satisfy some or all of the loan principal and costs.
To be sure, other loans are not collateralized, and as such are deemed “unsecured loans”. Simply because a loan is unsecured however, does not mean the lender has no recourse. In fact, unsecured debt is collected in a myriad of ways after a borrower defaults. It is common for judgements to be entered and wages garnished in collection of unsecured debts.
Contrast this with the non-recourse nature of a lawsuit loan. In a lawsuit loan transaction, no collateral is offered. The client assigns a portion of the proceeds of the lawsuit to the funding company in exchange for a present sum of money. Because the transaction is structured in this manner, the only transfer of value for purposes of collection, occurs if the lawsuit is successful. Therefore, lawsuit loan deals are deemed “non-recourse” which means the lawsuit loan company cannot collect directly from the client in the event the lawsuit is lost.
The failure of clients to be personally liable for the repayment of lawsuit loans makes it a more risky proposition for investors. That risk must be represented in the pricing and is a reflected in lawsuit loan cost industry wide.
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Lawsuit Loan Cost and Risk Assessment
20 years ago, when the lawsuit loan business was at its infancy, lawsuit loan companies charged high rates and fees for lawsuit cash advances. Lawsuit loan cost has decreased since that time as more historical data became available. With this data, investors were better able to assess the risk of loss and expected return. Until only a few short years ago, investors were ‘flying blind’ in an investment arena without a suitable data set of historic returns.
While lawsuit loan cost is lower than in years past, the average lawsuit settlement loan still commands a higher cost than a car or home loan. But this is true because the two are entirely different transactions as discussed above.
For example, a car loan is secured debt which means that if payments are not made, the creditor can repossess the vehicle in partial payment of the loan. Further, the lender can collect on the loan by attaching a claim on any other asset the client might own.
Conversely, a lawsuit loan is “non-recourse” in that if there is no recovery, the advance is not repaid. The lawsuit funding company purchases a portion of the proceeds of the case. So the transaction is really a asset purchase instead of a loan. If the lawsuit is unsuccessful however, the investor has NO claim against the plaintiff. Repayment must come from the lawsuit itself, that is the risk the lawsuit loan cost reflects.
As the lawsuit funding business evolved, it became more efficient. Because of competition, this efficiency reflects in pricing. And the savings are ultimately passed on to the client. Perhaps this is the most important reason why the quality of cases ultimately approved for a lawsuit loan is increasing and the price points for these “preferred cases” is decreasing.
Thank you for your interest in the lawsuit loan business.