You recently suffered a broken leg and head trauma from a T-bone car accident. It’s been close to a year since you’ve worked and your savings are starting to dry up. Although the average trial typically lasts 2 to 5 days,[1] getting there is half the battle; in fact, your attorney says you should see the inside of a courtroom in another year or so.
With time slowly ticking away and medical and utility bills piling up, not to mention a stack of late mortgage payments on your nightstand and foreclosure and eviction looming, should you consider a lawsuit loan? And, if so, which company should you choose?
Having been created in the 90s, pre settlement funding is still a relatively new industry. It is so new that federal and state rules and regulations have not caught up yet. Even in some states, it is (still) treated separately than other more traditional loans—like car loans and home loans from banking institutions.
That being said, no legal funding company is exactly alike. With so many variables, it can be hard to distinguish between pre settlement funding companies, let alone determine which one is right for you should you choose to apply for a lawsuit loan. Luckily, you don’t have to point and guess;read on to learn key differences to lookout for between legal funding companies.
#1. The Name May Be Different but the Service Is Still the Same
The truth is, some pre settlement funding companies don’t refer to the lawsuit loan as a loan, while others do. They may call it a cash advance or legal funding. Other companies may refer to the loan as pre settlement funding or settlement funding.
Either way, no matter what name the service goes by, it still is a cash advance plaintiffs receive (and must pay back) while their lawsuit is pending. In other words, the name may change but the service stays the same.
#2. How the Lawsuit Company Calculates Interest on the Lawsuit Loan
Let’s face it; the legal funding industry is a business. Lawsuit loan companies have to make money on their investments, which is why they charge interest on the cash advance. However, how they charge interest depends on the company.
For instance, some lawsuit loan companies may only charge simple interest, which is monthly interest on the principal (the lawsuit loan).[2] In other cases, the legal funding company may charge compound interest. Think of it as the interest on the interest of your lawsuit loan.
As you might suspect, compound interest usually is more expensive than simple interest (however this isn’t always the case).
Also, Keep in Mind…
Keep in mind how frequently the lawsuit loan company charges you that interest. Some companies may only charge you annually while others monthly or even bi-monthly.
This is why it is important that you ask the lawsuit loan company upfront about the type of interest they charge. (For more details about questions to ask lawsuit loan companies, check out “11 Questions to Ask Settlement Loan Companies.”)
#3. The Interest Rate
Speaking of the type of interest, the interest rate is another component that will vary by company. Some companies will charge 1% to 2% in interest on the principal. While others 5% to 7%.
Remember the interest type also affects how much you pay. Contrary to what it looks like on paper, that 1% to 2% compound interest may cost you more than 8% or even 10% simple interest.
As the length of time increases, as with any type of loan, you are going to pay more. Unfortunately, that being said, it is not uncommon for the plaintiff to pay annual interest rates of 100%,[3] and even end up owing the company more than his or her settlement.
This is all the more reason to (have your attorney) read the fine print and do the math on how much interest you will be paying in the long run.
#4. Advertising Methods
Like interest rates, some companies will choose to advertise their services via outbound marketing techniques like television ads and billboards. While others will choose inbound marketing tactics such as email campaigns and social media.
Then again, companies may combine both outbound and inbound methods to attract prospective applicants. No matter what advertising method the company uses does not determine how legitimate or illegitimate the company is.
A company who shows late night ads about lawsuit loans could be more legitimate than a company who uses billboards and bus ads. At the end of the day, don’t let advertising methods dictate which company you choose; look at the company in its entirety.
(Speaking of which, check out “11 Tips for Researching Pre Settlement Funding Companies” to learn about common red flags to lookout for.)
#5. Terms and Conditions of Your Contract
As we mentioned earlier, the rules and regulations are slowly making way. Which means your terms and conditions will probably be different than those of a traditional loan. At the same time, they are probably different from other lawsuit loan companies too, much less other applicants.
This is why it is important to include your attorney on the loan process and have him or her always, always, always be present during meetings between you and the lawsuit loan company. That way, you can get the most mutually beneficial contract possible.
#6. Paying Back the Loan If You are Awarded a Settlement
With some companies, you may not have to pay back the settlement loan company if you are not awarded a settlement. For other companies, you may have to pay back the loan despite the outcome.
Which is all the more reason for you to ask the lawsuit loan company about their loan policies (and to get their answer(s) in writing).
#7. Which Applicants They Accept and Deny
Lawsuit loan companies put their money on the line when they give a plaintiff a lawsuit loan—especially if the plaintiff does not have to pay them back if he or she isn’t awarded a settlement.
This calls for a lot of risk and rigorous screening on the lawsuit loan company’s end—usually only accepting applicants will cases that are a sure win.
Nonetheless, some lawsuit companies say that they do lose 5% to 20% because of losing cases.[4]
Still, lawsuit loan companies will screen and choose applicants differently based on what they determine to be a winning case. Some may have a whole team of attorneys giving their input.
While others, perhaps for budgetary reasons, may only have one or two attorneys. At the same time, some companies may not have licensed attorneys but staff members handling the screening process.
And, then you have to consider niche. Some companies will prefer plaintiffs who have injury suits. And others will go with more job discrimination or sexual harassment cases.
At the end of the day, it comes down to the individual settlement loan company—and if they have a specific niche or accept a wider variety of cases.
Final Thoughts: What It Comes Down To
Overall, with the number of differences between pre settlement funding companies (i.e. interest rates, type of interest, pay-back method, terms and conditions), it is important that you do thorough research and seek your attorney’s professional advice on this issue. Doing so could be the difference between receiving a high-interest loan or a mutually beneficial cash advance (in other words, a much better deal).
At the same time, know that lawsuit loans are one of several finance routes you can take to pay your bills while your suit is pending. Other financial avenues include traditional loans, borrowing from family and/or friends, and taking out another line of credit, among others.
All in all, there is a time and place when it comes to applying for a lawsuit loan; if you are on the brink of foreclosure and eviction with no financial opportunities in sight, it may be time to consider a settlement advance—which will provide you short-term relief while you get back up on your feet.
Have you received a lawsuit loan? Which company did you choose, and why? Let us know by commenting below.
Summary
- The money lawsuit loan companies give to borrowers may be referred to as lawsuit loans, pre settlement cash advance, legal funding, or another name—these all describe the same service
- Interest rate and type of interest (compound or simple), interest rate, and how frequently companies charge you will differ
- Advertising methods do not dictate which companies are legitimate and which are not
- Terms and conditions will differ by company and even the applicant—which is why you need to have a lawyer present and in the loop on the loan process
- Some lawsuit loan companies may require you to pay back the loan no matter if you are awarded a settlement or not; for others, you may only have to pay back the cash advance if you win
- Applicants settlement companies accept and deny will be dependent on their screening process, niche, and opinions from staff and attorneys
For more information, contact Legal-Bay!
[1] Glenn County Superior Court: Trial Jury
[2] Investopedia: Simple Interest
[3] Fox Business: Cash-now Promise of Lawsuit Loans Under Fire
[4] The New York Times: Lawsuit Loans Add New Risk to the Injured
