How Is Pre-Settlement Funding Different than a Bank Loan? 

If you are a plaintiff in a lawsuit, you may find yourself cash-strapped. You may be injured, yet the world does not stop simply because you may be in desperate financial straits. Insurance companies are aware of your financial situation; sometimes, they will purposefully drag their feet in settlement negotiations to get you to accept less money for your lawsuit.

Now, you need a way to continue to pay your rent or your mortgage, groceries, keep the lights on and the air conditioning and heat running. The whole point is that you and your family need money, and you need it now. So what do you do?

Some personal injury victims in this situation seek out a bank loan (or traditional lending). This is logically the first choice if you’re looking for money to pay your immediate expenses. But pre-settlement legal funding (or lawsuit loans) is another lending option that you may be able to use for your urgent expenses when traditional lending is no longer an option.

This piece will discuss the difference between bank loans and pre-settlement funding and which one might offer greater advantages for you.

What is pre-settlement funding?

Pre-settlement funding is a type of non-recourse financing for injured plaintiffs in ned of financial relief. Non-recourse means that a lawsuit loan company is investing in your lawsuit and lending you money based on their assessment of the strength of your legal case. They only get paid if you win your case. If for whatever reason, you don’t get a monetary settlement or award, then you aren’t required to repay the pre-settlement funding company.

What’s a bank loan?

Bank loans are almost always recourse loans, meaning that the bank will want to know it has a way to guarantee it gets paid back. Before a bank provides you with a loan, they’ll need some form of collateral that you pledge as security for the loan if, for some reason, you cannot repay the loan. 

If you stop paying the bank, it can seek to seize those assets to satisfy your unpaid balance. Because a bank loan is a form of recourse financing, you are allowing the bank the legal right to go after your house, your savings account, or other personal assets if you stop paying on the bank loan.

Difference between bank and pre-settlement loans

There are several factors you may want to look into if you’re trying to decide between a bank loan vs. pre-settlement funding, including the rates, what you need the money for, and how much you need.

With a bank loan, you will be required to repay the loan in regular installments, usually monthly. These will start after a short grace period you receive when the loan is first disbursed (or paid out to you). However, the payment schedule for a bank loan does not necessarily correlate with the progress in your lawsuit. 

If, for example, your case is all set to go to trial or mediation and then it gets delayed (which happens all the time), then a bank will usually still require you to make the required monthly installment payments, no matter that you have no means of doing so. Because banks rely on your credit score and assets, their interest rates are lower than legal funding companies.

On the other hand, with non-recourse legal funding, any other possible collateral you can offer, whether it be your financial assets, the value of your home, or your other personal resources that you may want to pledge as security for the loan, is meaningless. Settlement loan companies won’t take it into consideration.

All pre-settlement legal funding is paid once when your case resolves, whether through a settlement or a successful jury verdict. You are not responsible for paying back the lender anything during the period while your lawsuit is pending.

This is the biggest reason why pre-settlement funding has higher interest rates than bank loans: The high risks in non-recourse financing into future settlements. The interest rate on pre-settlement funding start at 28% a year up to 100% a year.

You can also get higher loan amounts than bank lending with legal funding. Depending on the value of your potential settlement, borrowers get up to 10%-20% of that amount. For example, if your case value is $1,000,000 you can get up to $100,000 is advances.

Banks won’t release more than $7,500 in personal loans or credit on average.

The takeaway

Most people understand bank loans. You walk into a bank, fill out paperwork, the bank takes weeks to decide on your loan application, and then, even if you are approved, you make regular payments to the bank until that loan is paid back. The downside, of course, is that bank loans are not an ideal solution for injured plaintiffs, given you may have irregular or no income and high expenses from ongoing medical treatment until their litigation resolves. 

If you are unable to work due to an injury that is the reason for your legal case and is also causing you to accumulate thousands or even tens of thousands of dollars in medical expenses, pre-settlement funding could be a better option for you. There is no risk involved because, unlike a bank loan, you are not responsible for paying back the principal, interest, or fees if your case does not succeed.

For additional information a cash advance on your pending lawsuit, check out our lawsuit loan page. Baker Street Funding offers legal financing with competitive rates, a fast application, and no hidden fees.