If you've filed a personal injury lawsuit and are in need of cash, you might be considering a lawsuit loan (also called lawsuit funding, settlement funding, and lawsuit cash advances). Lawsuit funding companies heavily advertise lawsuit loans. But don't jump at the first company you encounter. Lawsuit loans are very expensive—make sure you understand the costs, decide if you really need one, and then shop around to find the lawsuit loan with the best terms.
With a lawsuit loan, you borrow money against the judgment or settlement you expect to get from a lawsuit. These are particularly popular among personal injury plaintiffs who lose income or incur large medical bills because of an injury. Plaintiffs often seek a lawsuit loan to cover living expenses, mortgage payments, car loans, or medical bills. (Learn more about lawsuit loans and how they work.)
Lawsuit loans are expensive. When you pay the lender out of the proceeds of your settlement or judgment, you will pay back the principal you borrowed plus a funding fee or interest payment that might be double or triple what you borrowed from the lender. You will not be required to pay more than your settlement or award. (Read about the pros and cons of lawsuit loans.)
It is not unusual for personal injury cases to take months or years to settle or come to trial. The interest rates on lawsuit loans run between 27% and 60% a year—rates that are comparable to payday loans. On a $25,000 loan, the interest can cost you $12,500 or more in just one year. Because the interest is usually compounded monthly, if the case takes two years to settle, you will pay back a whopping $32,000 in addition to the $25,000 you borrowed.
You will save yourself considerable money in the long run if you can avoid taking out a lawsuit loan in the first place. Before you turn to a lawsuit loan, consider other resources like insurance proceeds, disability payments, or even friends and relatives. It might be worthwhile to approach your credit union or neighborhood bank for an installment loan—you'll likely end up paying much over time. Be careful before borrowing against the equity in your house or your 401(k) account—these should probably be a last resort.
Because the lending company is taking a substantial risk—it won't get repaid if you lose the case or settle for less than expected—it will only lend if it's confident that you will win or settle your case for a handsome amount.
When you apply for a lawsuit loan, the lender will contact your attorney to gather as much information as possible in order to evaluate your case. This process could take weeks and will require the cooperation of your attorney. It's likely you will need to follow up with the lender and your attorney to ensure that the lender receives the documentation needed to make a decision.
If you are a personal injury plaintiff, it's likely you'v received lending offers in the mail and seen numerous commercials on TV and the Internet. Finding a reputable company can be daunting. Here's where to start.
Your attorney. Your first resource should be your attorney. No doubt he or she will have opinions on which lenders to approach and which to avoid. Your attorney can also help you negotiate the best terms.
ALFA. Another resource may be the lawsuit funding's primary trade association, the American Legal Finance Association (ALFA). ALFA publishes a list of best practices to which its members agree to abide, covering such subjects as lending amounts, disclosure requirements, conflicts of interest, and false advertising. Keep in mind that a trade association's main mission is to promote the interests of its member companies, not your interests.
Once you've received several recommendations, contact each litigation funding company and do the following:
Above all, keep in mind the following: For the most part, state and federal agencies do not regulate litigation funding companies in the same way that they regulate banks, credit unions, and even storefront finance companies. There are few restrictions on how much they can charge for their services and few requirements as to how interest rates and other terms are disclosed. (To learn more, see Is Lawsuit Lending Regulated?)