Banks and other traditional financial institutions do not provide settlement loans based on the future compensation of a lawsuit due to the high risks. However, legal funding companies specialize in this type of financing designed for plaintiffs.
Here, you will learn the reason why banks don’t do settlement loans and your financial options to borrow money from your pending case.
The difference between a bank loan and pre-settlement funding.
What is a bank loan?
A bank loan is typically a recourse debt. This type of financing obligation is majorly issued to borrowers with good credit and stable income. Banks have standardized processes built into place for any type of loan, whether a mortgage to buy your dream home or a car loan to replace your old clunker. The exact paperwork you fill out may differ from bank to bank, but obtaining a loan from a bank typically involves the same standard application process. This process can often take weeks, if not months.
The bank loan process involves reams of paperwork and multiple levels of loan officers and managers just to get approved for a loan.
Most importantly, it will almost always involve you pledging something as collateral, whether it’s your house, a car, or personal assets. In other words, you agree that if for whatever reason, you cannot pay back the loan or you get behind on your payments, then the bank can seize your house or your car, or your other assets.
What is a settlement loan?
Pre-settlement funding is different from any other type of financing tool. A pre-settlement loan is a type of non-recourse financing arrangement due to its risk-free nature for the borrower. That means you are not going to lose your house or your car if the jury does not come through as you had expected or if you are unable to settle the case on the financial terms you hoped.
Unlike banks, a settlement loan company also won’t check your credit score or any other assets to secure the advance.
Settlement funding can be the right solution for you as you can use it for almost any purpose, whether to pay your rent/mortgage, groceries, power bills, and other utilities.
One thing to keep in mind is that a pre-settlement loan will carry much higher rates than a bank loan due to the high risk of not recovering from the case.
Although you may not be able to walk into your local bank to obtain a pre-settlement cash advance, there are plenty of settlement loan companies that specialize in them. That means you have many good options, even if the bank down the street is not one of those options.
Main reasons why banks don’t provide settlement loans.
The reasons that banks and traditional lending institutions don’t give pre-settlement loans are simple.
Banks prefer traditional borrowers.
The type of borrower that may be interested in pre-settlement funding often does not meet the ideal credit profile for someone who a bank typically would want to extend financing to.
Banks provide lower interest rates because they do not take the risk of lending to someone with a bad credit profile. it really is as simple as that.
Someone who has been injured and may not be working or have any income is the last type of loan applicant a bank wants. People who don’t have good credit because they got involved in a car accident and are too injured to work will most likely get denied for their loans.
Banks prefer a verified credit score, a long track record of successful payments by a borrower on other loans or financing, income verification to let them know you can pay them back, and collateral the bank can seize if they absolutely need it if a borrower defaults on a loan.
Banks hate risk.
Banks and other traditional financial houses do not do settlement loans because they are considered far too risky for them, and they hate high risk.
A financial institution like a bank will typically shy away from any loan where they may have a high chance of not being paid back, as pre-settlement funding can sometimes entail the lender’s loss if a lawsuit does not pay out the way the lender thinks it will.
Pre-settlement funding is often considered too risky by a bank because:
- The borrowers that need this type of financing are not often someone with a 9-5 job with a steady income that would enable them to make regular loan payments.
- Pre-settlement funding is non-recourse debt, and banks don’t provide non-recourse legal funding because it would mean that their money is not secured by your house like a mortgage or by a vehicle like a car loan. They want to be able to set a standard interest rate and get paid back every month.
On the other hand, pre-settlement funding is the exact opposite. The lawsuit funding company agrees to take an interest in your legal case and provide you with funds with no guarantee their bet will pay off. This is exactly the type of situation a bank loan officer often will run screaming away from.
The takeaway.
When you are a party to a personal injury lawsuit, are struggling financially, and need money to tide you over until your case either settles or wins the trial, you are probably not in a position to obtain a bank loan. However, there is always the option to receive pre-settlement funding from a legitimate lender that specializes in this type of financing.
Although a bank will not give you a lawsuit loan, pre-settlement funding companies will take the risk of giving advances on the pending settlement proceeds of a strong lawsuit based on the condition that your attorney will repay the money you borrow from them (including interest rates and other charges) when you win and recover monetary compensation from your lawsuit.
When you need to access money from your legal settlement to pay your daily expenses, pre-settlement funding from Baker Street Funding can assist you in getting what you need immediately. With Baker Street Funding, you can apply for a lawsuit loan via a simple online application and pre-qualify within hours. Our pre-settlement loans have fixed rates and caps that fit every personal injury case we finance.
