If you are in the midst of a lawsuit and need money, should you take out a lawsuit loan to tide you over until you settle the case or win a judgment? When faced with mounting bills and insufficient income, many plaintiffs (particularly in personal injury cases) want to borrow money against the proceeds they expect to get from the lawsuit—called lawsuit funding, settlement funding, lawsuit loans, or lawsuit cash advances.
Lawsuit loans are not always a wise choice. Below are the pros and cons of litigation loans—consider them carefully before making a decision to get lawsuit funding. (If you decide to get a lawsuit loan, shop carefully for one. Learn more in How to Shop for a Lawsuit Loan.)
Filing suit can be an expensive and time-consuming enterprise. If your injury causes you to lose income or incur unexpected expenses like medical bills, your financial situation may get much worse before you settle your case or win a judgment.
If you are in this situation, you might be considering a lawsuit loan or lawsuit cash advance to help alleviate financial stress while waiting for the lawsuit to settle. With a lawsuit loan, a lawsuit funding company buys your right to all or a portion of your lawsuit award or settlement in exchange for an advance that you receive while the case is still pending. (To learn more about lawsuit loans and how they work, see Lawsuit Loans.)
Read on to learn what you should consider before applying for one.
Below are the two main advantages of lawsuit cash advances.
Lawsuit loans can provide much needed breathing space if you're unable to cover living expenses, mortgage payments, car loan payments, and medical bills during your lawsuit.
If you're depending on the settlement or award to provide income or pay for needs like medical bills, taking out a lawsuit loan might allow you to take more time considering settlement offers. As a plaintiff, your goal shouldn't be to prolong the litigation, but to obtain a fair result. If a lawsuit loan helps relieve financial stress, you might find that you and your attorney will be able to take more time to negotiate with the defendant. If the defendant is not offering a fair settlement, a lawsuit loan might give you the financial wherewithal to go to trial.
Even if you need cash, a lawsuit loan might not be a good choice for you. Below are some of the main cons to taking out a lawsuit cash advance.
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 could be double or triple what you borrowed from the lender. (You will not be required to pay more than your settlement or award).
It is not unusual for personal injury cases to take months or even years to settle or come to trial. The interest rates on a typical lawsuit loan can run between 27% and 60% a year, comparable to some 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'll 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. 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. Borrowing against the equity in your house or your 401(k) account should probably be a last resort. They might be a less expensive alternative in the short run, but you risk losing your house to foreclosure or your retirement if you can't pay back the loans in a timely manner.
Because the lending company is taking a substantial risk, it only lends when it is confident that you will win or settle your case. If you lose, you won’t have to pay the loan back. If you win less than the lending company expected, you might not have to repay the entire amount. Therefore, the lender will want to ensure that your case is likely to pay off handsomely. Because lawsuit lenders are picky about the cases they accept, plaintiffs often report having to apply to five or six different companies before they find one interested in funding their case.
Lawsuit loans generally do not enjoy the same level of consumer regulation that federal and state governments have developed for other types of lending, like mortgages and car loans. A few courts and some states require lawsuit lenders to comply with state lending laws or that otherwise regulate lawsuit lenders. (To find out about lawsuit lending laws in your state, if any, talk to an attorney. You can also learn more about this topic by reading Is Lawsuit Lending Regulated?)
There are few restrictions on how much lawsuit funding companies can charge for their services and few requirements as to how interest rates and other terms must be disclosed. This makes it difficult to find and compare rates and other terms or find the disclosures you need to make an informed decision on the best loan or lending company for you. Even the vocabulary might differ from website to website. One company might advertise its product as a "loan" while another will call it an "advance."
Without widespread regulation of the lawsuit lending industry, it's difficult to know which companies are treating their customers fairly. With little government or industry oversight, it might be even more difficult to get satisfaction if you think you've been treated unfairly. Looking for a company that subscribes to a list of best practices or rules governing the client relationship might be a start. Services like the Better Business Bureau might provide insight with reviews and complaints.