Pros and Cons of Lawsuit Loans

When faced with mounting bills and insufficient income, many plaintiffs (particularly in personal injury cases) want to borrow money against the proceeds they expect from the lawsuit—called "lawsuit funding," "settlement funding," "lawsuit loans," or "lawsuit cash advances." What are these loans, and are they a good idea?

Lawsuit loan companies market mainly to plaintiffs in personal injury suits, like traffic accidents, slip and fall cases, and medical malpractice. Some also lend money to heirs waiting for the settlement of a deceased person's estate or to plaintiffs in employment or civil rights discrimination suits.

Lawsuit loans can tide you over if you can't cover living expenses and other costs during your lawsuit, and might provide you with time to negotiate a favorable settlement. But they're not always a wise choice. Here's why:

• lawsuit loans are expensive
• not all cases qualify for a lawsuit loan
• lawsuit loans usually aren't regulated like other loans, and
• it might be difficult to find a reputable lender.

We'll walk you through the advantages and disadvantages of lawsuit loans so you can decide whether a loan might be right for you.

What Is a Lawsuit Loan?

Lawsuit funding is a product offered to plaintiffs who expect to settle or win a judgment in a lawsuit. Here's how it works.

After you file a personal injury lawsuit, you apply for the loan with a lawsuit funding company. The company evaluates your case to determine how much you can expect to get if you win or negotiate a settlement. (The vast majority of personal injury cases are settled before trial.) The lender offers you a sum of money immediately.

In exchange, you agree to pay the lender that sum of money (the principal) and a "funding fee" out of the proceeds of your settlement or judgment. Usually, you don't have to make any payments before you settle the case or get a judgment. The lender gets paid from the proceeds of the lawsuit judgment or settlement.

Most lawsuit loans are called "nonrecourse" loans, meaning that if you lose your case (or collect less than you expected), you don't have to repay more than your settlement or judgment. While this sounds like an attractive feature—and it can be if your case goes south—it comes at a price. As we discuss later, lawsuit loans cost much more than other, more traditional loans, in part because the lender assumes the risk of you losing your case.

Opposition to Lawsuit Loans

Business and consumer advocacy groups have strongly opposed lawsuit lending, and have actively proposed regulating it. Pro-business groups claim that lawsuit loans encourage litigation, making it easier for plaintiffs to hold out for higher settlements or to take cases to trial.

In their push for more regulation, consumer groups have found themselves aligned with entities not known for their consumer advocacy, including insurance companies and groups like chambers of commerce. Sympathetic lawmakers in a few states have proposed or enacted business-friendly laws.

By far, though, the biggest threat to the lawsuit loan industry is the proposed federal Tackling Predatory Litigation Funding Act (TPLFA). Added in June 2025 to the Senate version of the Trump administration's tax cut and spending bill, TPLFA would impose a 41% tax on lawsuit funders' profits, a significant increase from the current average 15% tax rate.

The lawsuit funding industry sees TPLFA as an existential threat. If it becomes law, industry members say, it likely would mean the end of lawsuit funding.

The Cost of Borrowing Against Your Future Lawsuit Proceeds

A lawsuit loan "funding fee" can run between 2% to 4% per month. That might sound reasonable, but it equates to annual percentage rates of 27% to 60% or more. Considering that your lawsuit could take years to resolve, you might pay back double or triple the money you borrow.

Repaying the Litigation Funding Lender

When you reach a settlement with the defendant or obtain a judgment in court, certain expenses get paid off the top. These expenses include:

• the attorneys' fees (in personal injury cases, often one-third to one-half of any recovery you're awarded)
• the litigation expenses, like process server fees, copy and court costs, and.
• medical liens for services you got from doctors, hospitals, or other medical providers.

Then, after all other expenses are paid, the lawsuit lender gets paid from what's left. A couple of examples will illustrate.

Example 1: Settlement After One Year

You sue XYZ Insurance Company for $100,000 because of injuries you suffered in a traffic accident caused by one of the company's insured drivers. A lawsuit lender evaluates your case and offers to lend you $25,000 at 3% per month.

A year later, your case settles for $100,000. The attorneys' fees, litigation expenses, and medical liens total $50,000. Of the remaining $50,000, you must pay the lender the principal of $25,000, plus its funding fee of approximately $12,500. You collect the remaining proceeds of $12,500.

$100,000 Settlement amount

- $50,000 Attorneys' fees, litigation expenses, and medical liens

- $25,000 Principal repaid to lawsuit lender

- $12,500 Funding fee owed to lawsuit lender

$12,500 Remainder to you

Example 2: Settlement After Two Years

Let's say the case in Example 1 takes two years to settle instead of one. You'll owe the lender the principal of $25,000, but the funding fee balloons to $32,000. The lender receives the principal of $25,000 and the remaining $25,000 of the settlement. That leaves a deficit of $7,000.

After all is said and done, you won't get anything from your case. On the plus side, you're not on the hook for the $7,000 shortfall, either.

$100,000 Settlement amount

- $50,000 Attorneys' fees, litigation expenses, and medical liens

- $25,000 Principal repaid to lawsuit lender

- $32,000 Funding fee owed to lawsuit lender

-$7,000

What If You Lose or Settle for Less Than What You Owe?

As mentioned above, most lawsuit loans are nonrecourse. Lose in court and you don't owe the lender anything. Likewise, if you settle for less than what you expected, you won't have to pay more than the amount of your settlement.

Advantages of Lawsuit Loans

There are two main advantages of a lawsuit cash advance. A loan can:

• help pay your bills, and
• give you more time to negotiate.

Help Paying Bills

Lawsuit loans can provide much-needed breathing space if you can't cover living expenses, mortgage payments, car loan payments, and medical bills during your lawsuit. When you're dealing with the stress of a lawsuit, the last thing you need is other creditors breathing down your neck.

Get More Time to Negotiate

If you're depending on a settlement or judgment to provide income or pay other bills, taking out a lawsuit loan can give you more time to consider settlement offers. If a lawsuit loan helps relieve financial stress, you might find that you and your attorney can take more time to negotiate with the defendant. Similarly, when the defendant isn't offering a fair settlement, a lawsuit loan might give you the financial wherewithal to go to trial.

Disadvantages of Lawsuit Loans

Even if you need cash, a lawsuit loan might not be a wise choice for you. Here are some of the main cons to taking out a lawsuit cash advance.

Lawsuit Loans are Expensive

When you pay the lender out of your settlement or judgment proceeds, you'll pay back the principal you borrowed plus a funding fee or interest payment that could be double or triple what you borrowed.

It's not unusual for personal injury cases to take months or even years to settle or come to trial. Again, the interest rates on a typical lawsuit loan can run between 27% and 60% a year, comparable to some payday loans. As shown in the examples above, 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'll save lots of 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 be a last resort. They might be less expensive short-term alternatives, but keep in mind that they're recourse loans. You have to pay the money back even if you lose your case. In other words, you risk losing your house or your retirement savings if you can't pay back the loan as agreed.

Not All Cases Qualify for a Lawsuit Loan

Because the lending company is taking a substantial risk, it only lends when it's confident that you'll win or settle your case. 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 Lending Is Usually Unregulated

Unlike other types of lending, the federal government doesn't regulate lawsuit loans, and only some states have put consumer safeguards in place. The lawsuit lending industry argues that these aren't actually "loans," but are more like cash investments. They characterize the transactions as nonrecourse purchases of a portion of a potential future judgment or settlement.

Lawsuit lenders have convinced some state legislatures not to regulate their products as if they were traditional loans. But not all states agree. For example, a 2015 decision by the Colorado Supreme Court found that these arrangements are loans subject to state lending laws. To find out about lawsuit lending laws in your state, talk to an attorney.

In addition, there are few restrictions on how much lawsuit funding companies can charge for their services, or how interest rates and other terms must be disclosed. This means it can be tough to find and compare rates and other terms, or find the disclosures you need to make an informed decision on the best deal for you.

It Might Be Difficult to Find a Reputable Lender

Without widespread regulation of the lawsuit lending industry, it's hard 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.

Look for a company that subscribes to a list of best practices or rules governing client relationships. Services like the Better Business Bureau sometimes offer consumer reviews and complaint information.

What This Means for You

Because lawsuit loans have few consumer protections, you need to be extra vigilant if you're considering this type of funding. Understand what the loans are, carefully consider whether such a loan is a wise financial decision in your situation, and if you decide to look for a loan, shop carefully.