A settlement loan refers to a special type of financing given to a plaintiff involved in a personal injury or civil lawsuit before their case settles. It is based on the expected monetary value from the lawsuit settlement. Settlement loans allow plaintiffs early access to funds during what can be a drawn-out litigation process. But they also come with high fees and risks that borrowers need to understand.
How Do Settlement Loans Work?
Settlement loan companies advance money to people involved in lawsuits in exchange for the right to receive the proceeds from case settlements. Applicants usually connect with lenders through their attorneys. If approved, the loans have very high interest rates and the borrower must repay the loan plus fees once their lawsuit settles.
The Benefits of Lawsuit Loans
There are some potential upsides to settlement loans for plaintiffs in difficult situations:
Quick Cash Access These loans can provide plaintiffs faster access to funds that may be desperately needed to cover expenses during a lawsuit. This quick financing allows more flexibility to hold out longer rather than accepting an unsatisfactory early settlement offer.
Avoid Lowball Offers The cash from a settlement loan reduces pressure on the plaintiff to accept a low settlement just to end the lawsuit and get needed payout faster. This gives more leverage in negotiations.
Competitive Rates Sometimes A few lawsuit loan companies offer more reasonable interest rates and fees compared to predatory lenders. In those limited cases, the loans carry less financial risk.
The Risks of Predatory Lawsuit Lending
Unfortunately, most settlement loan practices involve extremely high fees and vulnerable borrowers:
Sky-High Interest Rates
Interest rates typically range from 36% up past 100% or more. Some lenders even charge 4-5 times the initial loan amount in accumulated fees over a year. These punitive rates create extraordinarily high repayment burdens.
No Settlement Means Problems
If a lawsuit gets dismissed or the settlement amount turns out lower than expected, the borrower still owes repayment on the loan plus very high interest and fees. This crushes plaintiffs that lose cases and still have to repay loans.
Opportunities for Abuse
Unscrupulous lenders often target the most desperate borrowers who have unreliable lawsuits but serious immediate financial problems. These predatory lenders can take advantage of vulnerable people in dire situations.
Better Alternatives Do Exist
Plaintiffs do have some other options for accessing funds to get through lawsuit delays including:
Attorney Funding
Many attorneys are willing to offer some advances on potential lawsuit settlements to cover important plaintiff expenses until cases resolve. This avoids exorbitant interest rates.
Other Legal Funding Sources
In some states, specialized legal financing companies offer loans comparable to regular personal loans rather than extremely high settlement loan rates. These carry more protections for borrowers as well.
What Should You Consider in Settlement Loans?
If exploring settlement loans, proceed very cautiously by thoroughly examining:
- Actual Interest Rates – Don’t just look at dollar amounts. Compare annual percentage rates across lenders.
- Total Repayment Required – Calculate all costs – interest plus origination/processing fees which greatly increase amounts owed.
- Lender Reputability – Search for complaints, negative reviews, regulatory actions against lenders you consider. Avoid new or questionable companies.
- Case Strength Assessment – Only borrow against lawsuits with very high likelihoods of significant settlements.
- Other Financing Alternatives – Always compare settlement loans versus any other loan options including from attorneys or legal financiers in your state.
Be very cautious and avoid settlement loans in weaker cases given the financial perils involved. But for plaintiffs in strong lawsuits facing extreme hardship during delays, legal financing – if shopped carefully – can be an option.
Conclusion
Settlement loans allow faster access to lawsuit proceeds but frequently impose steep costs and risks. Plaintiffs should research interest rates, total repayment obligations, lender backgrounds, case factors, and financing alternatives before accepting them. When settlement loans carry repayment amounts that dwarf original loans, proced with extreme caution. But safer legal funding does exists if you face hardship pursuing fair lawsuit compensation.
