When you’re a plaintiff in a class-action, personal injury, or civil rights discrimination suit with little to norevenue tricking in, settlement loans could be a viable option. However, not all settlement loans are one and the same. Lawsuit loans have only been around since the 1990s, which means there hasn’t been enough time for the federal and state governments to regulate this industry.
That means lawsuit funding companies don’t have to follow the same types of standards as other lenders.[1] What this entails is that without conducting thorough research and asking lawsuit funding companies the tough questions (i.e. cost of the loan, how many times interest rate is compounded, etc.), plaintiffs run the risk of owing more money in the long run—possibly even more than their settlement award.
That said, in this article, you’ll learn 7 more red flags to be on the lookout for when considering settlement loans: from when you may want to consider applying for one to when it’s time to turn your back to funding companies that offer sky high interest rates.
Red Flag #1: Settlement Companies That Profess Immediate Cash but That’s All You Know…
Who hasn’t seen those ads running on television, telling viewers about fast and easy cash advances they can give to victims. If you haven’t, most likely you’ve seen similar ads on the sides of buses, plastered on billboards, and pressed on the backs of benches.
Even if these examples don’t ring a bell, our guess is if you’re in a class-action lawsuit or are a personal injury victim, you’ve received several letters from funding companies promising fast cash immediately at no inconvenience to you.
Here’s the Reality
And the truth is, you may be able to receive that fast cash, but does it come with an extremely high interest rate or one that is compounded several times a month?
Will you still have to pay the lawsuit loan back if you aren’t awarded a settlement or if the award is a lot lower than expected? Maybe. Maybe not.
Go to Your Lawyer First
This is why instead of immediately turning to that funding company on TV, turn to your lawyer first to see what he or she recommends. Your lawyer may have some funding companies in mind.[2] That or they will meet with the funding company to review the contract and get you a better deal.
Red Flag #2: Settlement Company Doesn’t Reveal How Often Interest Rates Are Compounded
Interest rates from lawsuit loan companies tend to range between 27%-60% per year.[3]These rates often times are higher than other loans.
So, what’s up with that? Some companies subtly don’t mention how often these rates are compounded and may leave out that plaintiffs will have to pay settlement or no settlement; this leaves the plaintiff surprised, perturbed, and—especially if their settlement award is less than their loans—stressed.
That aside, lawsuit loan companies fronting plaintiffs money do face some risks. The case may go on longer than the lawsuit company expected, which means it’ll take longer for them to receive payment.[4]
Then, if the lawsuit loan company doesn’t require plaintiffs to pay them back if they aren’t awarded a settlement, they run the risk of not being paid back at all.
Nonetheless…
Always, always, always ask the lawsuit loan company about their interest rates:
- Are they simple interest or compound interest?
- How many times is the interest compounded per month? Per year?
- In what circumstances would the interest rate change?
These are just some crucial questions you need to ask. Needless to say, make sure you get the answers in writing.
Should you decide on moving forward with a settlement loan, you need to make sure all of the ins and outs pertaining to the loan and interest rate are in the contract and that your lawyer has looked over it and has given the thumbs up.
Red Flag #3: “Of Course, You Can Compare Our Rates with Traditional Loans”
Hearing this line (or something similar) come from a settlement loan company may be an indicator it’s time to look elsewhere.
The reality is, traditional loans are more heavily regulated versus lawsuit loans. Often times, this makes it hard (if not impossible) to put the services, fees, and rates side by side.
Yes, depending on the state, some lawsuit loans have started to become more regulated while others not so much; what this shows is the importance in conducting thorough research and asking the hard questions.
Red Flag #4: Misleading Details
Again, this goes back to the level of regulation; technically, loan companies are not required to give complete and clear pricing information, which means the details can be misleading.
This is why you need to get everything in writing and have it reviewed by your attorney before agreeing to a contract that, had you known the boilerplate information, would not have agreed to in the first place.
Red Flag #5: “We Accept Everyone”
Remember when we told you lawsuit loan companies take a risk when they invest in a plaintiff? That being said, you should know that settlement loan companies will not accept every plaintiff that walks through their doors.
In fact, The New York Times states that the three largest advance funding companies estimate that they reject roughly 70% of applicants.[5]In other words, seven out of ten people will be rejected.
While we can’t apply this rejection rate to every lawsuit loan company, we can say that it is highly suspicious if a settlement loan company accepts every applicant.
Funding companies have to review the applications, calculating which ones have the highest success rate. It is these cases that they will accept, not ones where too much dice rolling is involved.
Red Flag #6: “We Cap Our Interest Rates at Insert-Number”
Technically, lawsuit loan companies don’t have to cap their interest rates. (Which is why some settlement loan companies will sneak in sky rocket rates that can even exceed 100% per year.)
So, when you hear a lawsuit loan company say they cap their interest rates at a certain number, ask them specifically what they mean. (Yes, this red flag is similar to Red Flag #4).
Perhaps the funding company states they won’t make you pay more than your settlement? Or perhaps they aren’t factoring in the interest when it’s compounded?
Whatever the case, get specific; get your lawyer involved; and get everything in writing (it’s that important it’s worth repeating).
Red Flag #7: “You Just Have to Pay Us Back If You Win”
This isn’t necessarily reason enough to walk out the doors but it is worth having a straightforward conversation on what the lawsuit company is saying.
What exactly do you have to pay back? Do you just have to pay back the principal? What about the interest? Are there other fees involved? What constitutes “winning”? When do you have to pay back the loan?
Red Flag #8: “Our Company Meets Regulation Standards”
As we’ve been saying throughout this article, the lawsuit loan industry isn’t entirely regulated yet. This goes back to the fact that state and federal governments haven’t caught up with the relatively new industry.
While this doesn’t mean every lawsuit loan company is a scam, it does mean you have to do your research and be wary of statements like the above.
Technically, the statement could be true—what little regulations there are in that state the lawsuit loan company may be complying with them—but, putting that into perspective, they most likely still have free rein compared to other traditional loans.
As mentioned, do more research, get the specifics and talk with your lawyer to determine next steps.
Final Thoughts
Lawsuit loans are a type of cash advance funding.[6] Some plaintiffs have had success from taking such loans; others haven’t. Should you be in a situation where you have no financial options available, you may be in a position to consider one.
Know that, in some circumstances, lawsuit loans do serve a legitimate role. At the same time, you need to pay attention to the signs, talk with your lawyer, and rule out any red flags.
What other red flags do plaintiffs need to be aware of? How can plaintiffs decide if a lawsuit loan company is legitimate or not? Leave a comment.
Summary
- Be wary of settlement companies that only talk about convenience but not about the costs
- Pay attention if lawsuit loan companies are revealing if the interest is compounded or not
- Funding companies that say statements like “compare our loans to other standard loans,” “we accept everything,” and “Our interest rates are capped” may not be telling the whole tale
- “Our company meets industry standards” and “Pay us back only if you win” may be misleading
- No matter what, ask the hard questions, talk with your attorney, and get everything in writing
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[1] The New York Times:Lawsuit Loans Add New Risk for The Injured
[2] Nolo: How to Shop for a Lawsuit Loan
[3] The New York Times: Lawsuit Loans Add New Risk for The Injured
[4] The New York Times: Lawsuit Loans Add New Risk for The Injured
[5] The New York Times: Lawsuit Loans Add New Risk for The Injured
[6] Investopedia: What is a Lawsuit Settlement Loan?
