Have you been injured in an accident that was someone else’s fault? Or were you wrongfully fired from your job due to discrimination? If you have a pending lawsuit seeking compensation for these types of cases, you may be waiting a long time before you receive any settlement money. Lawsuits can drag on for years. In the meantime, you may be struggling financially from mounting medical bills, inability to work, and general living expenses. This difficult situation leads many people to seek out what are known as settlement loans.
A settlement loan provides plaintiffs in personal injury or employment discrimination lawsuits with cash upfront while awaiting their case outcome. But these loans come with risks and extremely high fees that eat away at any future settlement. In this article, we will cover exactly how settlement loans work, reasons people seek them, alternatives to consider, and the pros and cons of utilizing this form of financing.
Settlement Loan Eligibility and Approval Process
Not just anyone can walk in off the street and obtain a settlement loan. There are eligibility requirements you must meet for approval:
- You must have an attorney – The loan company will want to speak to your lawyer to verify details about your case such as type of lawsuit, expected settlement amount, and likelihood of winning. This helps them determine approval and loan amount offered.
- Strong likelihood of a decent-sized settlement – Without confidence you will win your case and receive enough settlement funds to repay the loan, a lender is unlikely to approve the risk.
The application and approval process is quick and straightforward:
- Complete loan application – You provide information on your case details, requested loan amount, attorney’s contact, and some personal details. A credit check is often not required.
- Verification and decision – The lender contacts your attorney to verify case information and settlement expectations. If they are comfortable with the risk, they provide a loan offer.
- Accept offer and receive funds – If you accept the loan terms, the lender directly wires you the cash, often within 24 hours. This provides fast relief to financial issues.
Settlement Loan Repayment and Fees
If approved for a settlement loan, keep in mind you don’t repay it through predictable installments like a traditional bank loan. Rather, the lender deducts everything you owe directly from your future lawsuit settlement in one lump sum. This includes:
- Original loan principal – The amount of cash actually provided upfront at the time of approval.
- Interest and fees – Extremely high interest rates of 30-60% or more annually are common. Origination and processing fees also apply. For loans left outstanding during lengthy lawsuits, the total interest and fees can exceed the original loan amount.
So if you are approved for a $10,000 settlement loan and fees/interest accumulate to $15,000 by the time your lawsuit settles, nearly two-thirds of your potential settlement immediately goes paying off the loan.
The lender assumes your lawsuit risk. So if you lose the case entirely, some settlement loan companies may still come after you to collect on the outstanding balance you owe. Others write off the loss as cost of doing business. But your credit can still suffer if you agreed repayment was required regardless of case outcome.
Why Do People Seek Settlement Loans?
With such outrageous fees and repayment uncertainty, why would anyone seek a settlement loan? There are a few motivations:
Immediate Financial Assistance
The lengthy litigation process surrounding personal injury and employment discrimination lawsuits can span months or years before reaching resolution. Despite having what you feel is a “slam dunk” case, you have little income coming in during this timeframe. Savings quickly dry up. Settlement loans provide a way to stay financially afloat and cover important expenses while awaiting your day in court.
The funds enable you to pay outstanding and ongoing medical bills, afford living necessities, keep the lights on and roof over your head, care for dependents, and avoid relying solely on the goodwill of family and friends. Since the loan requires no credit check, it appears more attainable to those already in difficult financial circumstances.
Faster Payment to Trial Attorney
There is another reason some plaintiffs consider settlement loans favorable. Many personal injury or discrimination attorneys work cases on contingency, meaning they only receive compensation if you win and get settlement funds from the defendant. Their typical fee is 30-40% of your total settlement amount.
So if you receive no settlement, neither does your attorney. This gives them incentive to work hard winning compensation you deserve.
However, rather than waiting months or years for settlement funds to finally reimburse them, settlement loans allow plaintiffs to quickly pay attorney fees out of the loan principal. This keeps attorneys happily working cases without growing impatient awaiting their share. The remainder of loan funds then cover plaintiffs’ important living expenses as their case wraps up.
Alternatives to Settlement Loans Worth Considering
Before committing to a settlement loan and losing a large chunk of your potential award to fees and interest, a few lower-risk options to consider:
Traditional Bank Loans
If you have the credit history and income or assets for approval, a traditional installment loan from your personal bank or credit union likely provides lower interest rates and predictable manageable payments. This avoids intensely high financing fees digging into your settlement.
Ask Attorney About Advances
Discuss with your discrimination or injury attorney whether getting a advance on anticipated fees from your eventual settlement is possible. If they expect a decent payout, some may agree to this mutually beneficial arrangement. The advanced funds could then help cover your most pressing bills before settling your case.
Crowdfund Settlement Expenses
Online crowdfunding platforms like GoFundMe enable you to share your case and financial situation. Family, friends, and even empathetic strangers may donate to the campaign. This presents a way to fund daily expenses without loans or attorney advances. Any amounts raised could simply help fill the gap until you receive your settlement.
The Pros of Settlement Loans
While certainly a last-resort option, there are some potential upsides to obtaining financing against an anticipated legal settlement:
Fast Approval and Cash Without Credit Checks
When you’re financially strapped from being unable to work and face growing medical bills or even eviction notices on your home, waiting weeks or months for traditional financing just won’t cut it. Settlement loans often approve applicants and fund cases in as little as 24 hours. They also don’t do stringent credit screenings, making approval more likely for those already in financial distress.
Pay Living Costs While Awaiting Day in Court
Too many Americans live paycheck to paycheck even in good times. So missing work for many months or longer while a complex lawsuit winds through the legal system leaves plaintiffs struggling just to survive. Settlement loans allow them to cover reasonably necessary food, housing, transportation, and other basic living costs their situation might otherwise prevent.
Attorney Still Collects Full Fees
As mentioned earlier, allowing your contingency fee attorney to immediately access a portion equivalent to their typical fees from settlement loan proceeds keeps them financially motivated to work hard on your case. They don’t lose patience awaiting their compensation for months or years if the litigation timeline gets extended.
Of course, reasonable attorneys put their own financial interests aside and professionally work your case regardless. But settlement loans allow plaintiffs peace of mind knowing their representation remains both eager and capable of dedicating full resources until case resolution.
The Cons of Settlement Loans
While they address urgent needs for cash, take advantage of settlement loans requires extreme caution and full understanding of their downsides:
Astronomical Fees and Interest
The interest rates and fees settlement loan companies charge drastically cut into plaintiffs’ eventual lawsuit compensation. And these financing charges rapidly accumulate the longer a complex case remains unresolved. Due to the high risk such loans carry, state laws generally impose few limitations on the rates lenders can charge. But the results still financially devastate recipients once fees are deducted from their award.
Owe Money Even If Lose Case
Reputable settlement loan companies don’t require repayment if your case totally fails and the court awards you no compensation. But some still hold recipients responsible for repaying principal, interest and fees out of their own pockets later if they lose. And having an outstanding balance sent to collections hurts your credit badly. Even if you win something, just not enough to fully repay the loan, they might come after you for the difference.
Large Chunk of Settlement Disappears
After months or years anxiously awaiting your day in court, hearing the jury or settlement judge award you $100,000+ sounds amazing. But imagine having half or more immediately deducted to repay your settlement loan and rapidly accumulated fees. Further imagine if it turns out you took such a large loan that attorneys fees and medical bills consume much of the remainder. Your final disbursement ends up painfully disappointing even after winning. Settlement loan customers often regretfully discover they were left with comparatively little out of their apparent victory.
Conclusions and Summary
Settlement loans undoubtedly help plaintiffs urgently afford daily necessities, legal fees to their attorneys, and other important costs while engaged in lengthy lawsuits seeking compensation for injuries, discrimination or wrongful termination. Approval of these unique loans just requires having a lawyer take your strong case and likely decent settlement. Fast access to funds requires no credit screenings.
However, settlement loan consumers must weigh heavy monetary risks before agreeing to sky-high financing fees that exponentially grow the longer a case drags through the litigation process. And some firms require full repayment even if you ultimately lose your entire case. This leaves recipients still owing large balances with no court award to fund it. Even winning big at trial doesn’t necessarily guarantee having much left over after the loan company takes their piece.
If considering a settlement loan, first pursue lower-cost traditional borrowing options you may qualify for or ask about receiving advances from your attorney. As a very last choice, settlement loans remain far superior to not paying essential living expenses or risking homelessness while engaging in litigation simply because you couldn’t afford to await its resolution. Just ensure you completely understand repayment terms and associated risks clearly beforehand. With such knowledge, recipients avoid unpleasant surprises down the road.
