Pre-Settlement Legal Funding Vs. Traditional Loans

Facing a tough financial decision during an ongoing lawsuit and feeling overwhelmed about what to do next? Thousands of personal injury victims feel the same strain you’re feeling. The good news is that there are some financing options available, such as applying for pre-settlement funding or for a traditional loan. While they may seem similar at first glance, they serve different needs and come with unique terms. 

Pre-settlement funding, for instance, is often sought by plaintiffs awaiting a legal settlement. It provides immediate financial relief without the typical constraints of traditional loans. On the other hand, traditional loans are more generalized financial instruments accessible to more people for certain purposes.

Ready to explore the difference between pre-settlement legal funding and traditional loans? Let’s dive in. Rest assured that by the end of this article, you’ll have the knowledge you need to choose the option that’s right for you.

How do traditional bank loans work?

A traditional bank loan provides you with money in return for the promise to repay the original amount plus interest over a specified period of time. You can use these loans are used for a variety of reasons. These include uses such as small business funding to specific personal needs like home improvements or large purchases.

If you are interested in getting a bank loan, the process starts with an application. You apply at a bank or online and provide necessary information such as the purpose of the loan and personal and financial history and other details. The bank then reviews your information, checks your creditworthiness, and determines the risk associated with lending you money.

If the bank decides that you’re capable of repaying the funds, it will approve the loan. Here is where the loan terms are established. Then bank will then issue you a promissory note that specifies the loan amount, interest rate, loan term (length of repayment period), and repayment schedule. The interest rate may be fixed (same throughout the term) or variable (changes based on market rates). Finally, you agree to repay the traditional loan in installments over a set period, often monthly.

For example, if you borrow $10,000 from a bank with an interest rate of 5% over 2 years, you would repay the bank in monthly installments of approximately $438. This includes a portion of the principal amount and the interest accrued. Over the course of 2 years, you will have repaid a total of approximately $10,512, including $512 in interest.

Take note that failure to repay the loan as agreed can result in penalties, such as late fees and damage to your credit score. In some cases, the bank may even seize collateral (if there is any) to recover the loan amount. Collateral is an asset that a borrower offers as a way for a lender to secure the loan.

How does pre-settlement legal funding work?

Pre-settlement funding, often referred to as a lawsuit loan or legal funding, is a non-recourse cash advance that plaintiffs can obtain from their pending legal cases. This type of loan is extremely helpful when you’re experiencing financial hardships while awaiting a settlement or trial verdict.

Here’s how legal funding typically works:

1. Application. The first step involves submitting a pre-settlement funding application with the lender of your choice. This application outlines the specifics of the legal case, including the type of case, the injuries or damages sustained, and the expected settlement amount.
2. Review and Evaluation: After the lawsuit lending company receives your application, the case review starts. This includes communication with your attorney to gain more insight into the strength and estimated value of the claim.
3. Approval and Agreement: If the funding company determines that your case has merit and a strong likelihood of winning over $50,000 in settlement money, it will extend you an offer. The offer will detail the amount of money you can get in advance and the ‘fee’ or ‘interest‘ to be collected if you recover for your damages.
4. Transfer of Funds: Once you accept the offer and sign the agreement, the pre-settlement funding company will transfer the funds. This can usually be done through a check or a direct deposit to your bank account.
5. Repayment: Repayment happens only after the case is resolved successfully. If your case is successful and you obtain your settlement money, your attorney is responsible for repaying the lender from the proceeds. Importantly, if you lose the case, you are not required to repay the funds and walk away from owing anything.

To illustrate, let’s consider an example: Suppose a person is injured in a car accident due to the negligence of another driver and has filed a lawsuit. While the accident lawsuit is pending, the victim is unable to work and is facing financial difficulties. He applies for pre-settlement funding and receives an advance of $20,000 to cover living expenses and past-due bills. If the case ends up in favor of the plaintiff, he pays agreed-upon borrowed amount from the settlement or award, plus the costs of the loan. If the lawsuit is unsuccessful, the person generally will not have to pay back the $20,000.

How pre-settlement legal funding and traditional loans compare.

As mentioned above, lawsuit funding and traditional banking are two different financial avenues that serve distinct purposes. Here are some key differences between the two:

1. Purpose. Traditional banks provide a range of financial services such as savings, checking accounts, mortgages, personal and business loans, credit cards, and investment services. On the other hand, pre-settlement legal funding is a specific kind of funding provided to plaintiffs to cover their expenses until a settlement is reached.
2. Application Process. Banks usually require a thorough process, including credit checks, collateral, and financial history. In contrast, legal funding companies base their funding decision on the merits of the case. If the company believes the case is strong and likely to win, it will provide the funding.
3. Repayment. In traditional banking, irrespective of the purpose of the loan, repayment becomes due as per the agreed schedule, regardless of the outcome. However, in pre-settlement legal funding, repayment is contingent on the success of the case. If you lose, you usually do not owe anything back..
4. Interest Rates. Traditional banks often offer lower interest rates as compared to legal funding. This is because legal funding companies take the risk of not being paid back if the case is lost, therefore, to compensate for this risk, the interest rates are often higher.

Conclusion

Evaluating the financial landscape during a lawsuit doesn’t have to be so hard. By understanding the key differences between pre-settlement funding and traditional loans, you’ve taken a significant step toward making a sound financial decision.

Recap of Key Insights:

• Pre-Settlement Legal Funding: Ideal for those awaiting legal settlements, offering flexibility without typical loan criteria.
• Traditional Loans: A broader financial tool, suitable for limited personal or business needs, with standardized terms and conditions.

Remember, the right financial choice can make a significant difference in your life while waiting to reach a lawsuit settlement. Whether it’s pre-settlement legal funding or a traditional loan, the choice is yours, and the decision is in your hands.

Are you interested in learning more about pre-settlement legal funding? Baker Street Funding provides lawsuit cash advances to help cover your important expenses while the legal process takes its journey to completion. Check out our legal funding application —and take control of your financial future today.