Guaranteed Loans vs. Pre-Settlement Funding: Key Differences

When you’re in a financial bind, the financial options available can seem—confusing. Two terms that might come up are “guaranteed loans” and “pre-settlement legal funding.” While they might sound similar at first glance, they serve very different purposes, and come with distinct terms and conditions. Let’s dive into what sets them apart so you can decide which one might be right for you.

What Is a Guaranteed Loan?

A guaranteed loan is a type of loan where a third party—often a government agency—promises to cover the loan if the borrower defaults. These loans are typically used by borrowers who might not qualify for a traditional loan due to poor credit or lack of financial resources.

Types of Guaranteed Loans:

• Guaranteed Mortgages: These are often backed by agencies like the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA). They help homebuyers who might not otherwise qualify for a mortgage.
• Federal Student Loans: Backed by the U.S. Department of Education, these loans are easy to qualify for and come with favorable terms, including lower interest rates.
• Payday Loans: While technically guaranteed by the borrower’s paycheck, these high-interest loans can be pretty risky and often leave borrowers stuck in a debt spiral.

In all these cases, the third party steps in to cover the debt if the borrower cannot.

What Is Pre-Settlement Legal Funding?

Pre-settlement legal funding, often referred to as lawsuit loans or legal funding, is a financial advance for plaintiffs involved in lawsuits. Unlike traditional loans, this type of funding is not based on your financial history. Instead, it’s based on the strength and net value of your legal case. You only repay the advance if your lawsuit results in a settlement or favorable verdict.

Once approved, funds can be disbursed quickly, often within 24 hours with most lenders. The money can be used for anything, but it’s often needed to cover living expenses, medical bills, rent, mortgage, utilities, or other costs while you wait for your case to settle.

Key Differences Between Guaranteed Loans and Pre-Settlement Legal Funding

Collateral vs. Non-Recourse

• Guaranteed Loans: These loans are backed by collateral or a third-party guarantee. This means if the borrower defaults, the lender is still protected—either through the collateral, which could be seized and sold, or through a guarantor, like a government agency, that takes on the debt.
• Pre-Settlement Legal Funding: This is not a loan, but non-recourse funding. That means you only repay if you win or settle your case. There’s no collateral required, no third-party guarantor involved, and you’re not personally liable if your lawsuit is unsuccessful. The funding company is assuming all the risk.

Eligibility

• Guaranteed Loans: Approval often depends on creditworthiness and financial history. However, a third-party guarantee can make it easier for individuals with poor credit to qualify, as the risk for the lender is reduced.
• Pre-Settlement Legal Funding: Eligibility is solely determined by the merits of your lawsuit. The strength of your case, the evidence presented, and the likelihood of a favorable outcome are what matter—not your credit score, income, or financial history.

Impact on Credit Scores

• Guaranteed Loans: Managing repayments well can improve your score, but missed payments can damage it. The lender reports your payment behavior to credit bureaus.
• Pre-Settlement Funding: There’s no credit check involved, and if you lose your case, you don’t have to repay. Because repayment is contingent on winning your case and doesn’t involve traditional loan structures, this type of funding doesn’t affect your credit score at all.

Use of Funds

• Guaranteed Loans: Typically used for education, home purchases, or emergency funds for borrowers with limited creditworthiness.
• Pre-Settlement Funding: Specifically designed to help plaintiffs cover basic urgent needs during a lawsuit, there are no restrictions on fund allocation.

Regulations

• Guaranteed Loans: Heavily regulated, especially those backed by government agencies. They have clear terms, protections, and caps on interest rates.
• Pre-Settlement Funding: Regulation varies by state, so it’s important to work with a trustworthy funding company that provides clear terms and limits on interest.

Which Option is Right for You?

Choosing between a guaranteed loan and pre-settlement legal funding depends largely on your financial situation and needs. While both options provide access to funds, they do so under very different circumstances.

For plaintiffs involved in a lawsuit, pre-settlement legal funding offers a unique, non-recourse option that provides financial relief without the burden of repayment if the case is lost. In addition, it can help you reach a more favorable agreement when the pressure of resolving your case quickly due to financial difficulties may force you to accept a lower settlement.

If you’re looking for a cash advance during a pending lawsuit and want to avoid the risks associated with guaranteed loans, pre-settlement legal funding from Baker Street Funding may be the right choice. We’re here to help you navigate your options and secure the funds you need—honestly and transparently. Apply today.

FAQ

Is Pre-Settlement Legal Funding a Guaranteed Loan?

Pre-settlement legal funding is not a guaranteed loan. This type of funding, also known as lawsuit loans or legal funding, is a non-recourse advance against a potential settlement in a lawsuit. Here’s how it’s different from a guaranteed loan:

1. Non-Recourse: The key feature of pre-settlement legal funding is that it’s non-recourse. This means that if the plaintiff (borrower) loses the case, he or she is not obligated to repay the cash advance. The funding company takes on the risk, making it fundamentally different from a guaranteed loan where repayment is still required, typically by a third party.
2. No Third-Party Guarantee: Unlike guaranteed loans, there’s no backup from a third party to cover the repayment if the borrower defaults. The funding company itself bears the risk and does not have any external guarantees.
3. Risk-Based Approval: Legal funding companies assess the merits of the lawsuit to determine whether to provide financing. They essentially bet on the case’s success, as their repayment depends entirely on a positive settlement or judgment. If the case fails, the plaintiff owes nothing.

What is a Guaranteed Loan?

A guaranteed loan is a loan in which a third party, like a government agency, assures repayment if the borrower defaults. This guarantee reduces the risk for the lender, making it easier for borrowers, especially those with poor credit or limited financial resources, to qualify for loans they might not otherwise be eligible for.

Can I Get Pre-Settlement Legal Funding for Any Type of Lawsuit?

Not all lawsuits are eligible for funding. Most commonly, funding is available for personal injury cases, medical malpractice claims, wrongful death, car accidents, and third-party negligence claims.

How Long Does the Process Take?

The funding process can be relatively quick, often taking as little as 24 to 48 hours from the application to approval. Once approved, funds can be disbursed quickly, allowing plaintiffs to cover urgent expenses while their lawsuits are ongoing. However, the exact timeline may vary based on the funding company and how complicated your case is.