Is a Pre-Settlement Loan a Good Idea for Cash-Strapped Injury Claimants?

Pre-settlement loans offer a risk-free (but expensive) way of getting quick cash while you wait for your injury case to resolve.

By , J.D. ● Villanova University School of Law

If you're the plaintiff in a personal injury case, there's a chance you're in a financial bind, especially if you have extensive medical bills, no health insurance, and can't work due to your injuries. Larger issues may be at play too, such as the COVID-19 pandemic and its catastrophic economic impact.

Most personal injury cases settle, but the process can still drag on. Even if you have a strong case, one likely to result in a substantial recovery, personal injury claims can take months or even years to resolve, even when it's obvious who's at fault for the accident.

During the time it takes to obtain a settlement or court judgment, bills and other financial obligations will become due. To help make ends meet until your case resolves, some businesses offer pre-settlement loans. These may sometimes go by other names, such as:

  • consumer legal funding
  • non-recourse advance funding
  • litigation financing
  • lawsuit loans
  • settlement loans
  • pre-settlement advances, and
  • pre-settlement funding.

How do agreements like this work, and are they a good idea?

What Is a Pre-Settlement Loan?

The term pre-settlement loan is a bit of a misnomer, since these aren't technically loans (at least not typically). It's more of an advance based on how much your personal injury case is worth, according to the creditor. And in most cases, you don't have to pay it back unless you can achieve a financial recovery in your case.

How Much Can I Get From a Pre-Settlement Loan?

It depends on the facts of your case, the terms of the advance, and the pre-settlement loan company you're working with. Typical pre-settlement loans amount to about 10% to 15% of your case's estimated value.

When deciding how much to advance to a plaintiff, a pre-settlement loan company will look at several factors, including:

  • How much insurance coverage the defendant has.
  • What the plaintiff can potentially recover in damages.
  • The company's confidence in the defendant's liability for the plaintiff's injuries.

How Much Does a Pre-Settlement Loan Cost?

This is where things get interesting, and where you will need to pay close attention to the terms of your advance. Depending on the terms of the advance, you can expect to pay between 20% and 60% in interest each year. Let's look at an example to illustrate.

Let's say a pre-settlement company thinks your case is worth $500,000 and offers you a 10% advance with an interest rate of 40% compounded annually. Let's also assume the case settles after two years.

At the beginning of your case, you will receive $50,000. After the first year, you will owe $70,000 to your pre-settlement company ($50,000 x 40% = $20,000; $20,000 + $50,000 = $70,000).

After the second year, you will owe $98,000 ($70,000 x 40% = $28,000; $28,000 + $70,000 = $98,000).

This means you will have to pay back almost double your original advance amount. That's a pretty hefty price for a case that lasts just two years. But there are other details besides the interest rate that will determine how much the pre-settlement loan will cost.

For example, the advance could be subject to simple or compound interest. If compound interest applies, the compounded interest can occur at different intervals, such as daily, weekly, or monthly.

All else being equal, an advance subject to compound interest will be more expensive compared to an advance that has simple interest. And the more often it's compounded, the more you will have to pay.

What Happens if I Can't Pay Back the Pre-Settlement Loan?

There are two potential scenarios. In scenario one, you recover nothing from the defendant. In scenario two, you obtain a recovery, but it's not enough to pay back the advance and required interest or fees.

In either scenario, the vast majority of the time, the pre-settlement company will have to take the loss. There might be some companies out there that will require you to still pay back the advance or somehow make up the difference, but these companies are in the minority, and you should avoid them at all costs. Ask questions, and check the fine print of any agreement before you sign.

So, Are Pre-Settlement Loans a Good Idea?

It depends. If you desperately need cash and have no other way to get it, a pre-settlement loan is an option. But for many plaintiffs, there may be more affordable sources of cash available.

For example, you could get a personal loan from a bank, a home equity line of credit, or use credit cards to hold you over until your case ends. Some credit cards offer cash advances that, while expensive, are still cheaper than a pre-settlement loan. But you may not have access to this level of borrowing capacity, especially if you don't have a great credit history.

Another thing to keep in mind is making sure your lawyer gets paid. In most personal injury cases, the attorney gets paid on a contingency fee basis. So your attorney doesn't get paid unless they can obtain a financial recovery for you. However, if they do recover some money, they will typically get anywhere from 20% to 40% of the amount recovered.

At the end of your case, it's quite possible that after paying your attorney and paying off the advance, you will have little money left over. This is an important scenario to consider before taking out a pre-settlement loan. Learn more about working with a personal injury lawyer and the costs of taking a personal injury case to court.

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