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.
Your lawsuit may be strong, according to your attorney, but between the backlogs created by Covid-19 and the number of cases that are filed in every corner of the country, people have to wait longer and longer for lawsuits to resolve.
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. That said, 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, and the myriad other daily expenses that cannot be put off even if you are injured or otherwise unable to work. You and your family need money, and you need it now.
So what do you do? Some people in this situation seek out a bank loan (or traditional lending), whereas others may seek pre-settlement legal funding (or lawsuit loans).
A bank loan might seem the first choice if you’re looking for money to pay your immediate expenses. But pre-settlement funding is another lending option that you also may be able to use for your urgent expenses when traditional lending is no longer an option.
Because both types of financing have advantages and disadvantages, it’s important to understand their differences and how a bank loan vs. pre-settlement funding might work for you.
In this article, we’ll address the difference between bank loans and pre-settlement funding and how one could be more beneficial for you than the other.
What’s pre-settlement funding?
Pre-settlement funding is a type of non-recourse financing. That means that a lawsuit loan company is taking a stake in your lawsuit and lending you money based on its assessment of the strength of your legal case, given that the only way a lawsuit funding is repaid is if you win your case.
With lawsuit funding, the only thing a funding company considers as an asset is your lawsuit’s future proceeds and, specifically, the strength of that lawsuit.
Your pending recovery is what a pre-settlement funding company is taking a stake in and how it will get repaid, so your lender is much more concerned with the strength of that litigation, given it is the only means the lender will recover their investment.
If for whatever reason, you don’t get a monetary settlement or award, then you are not 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 on the loan, the bank can seek to seize those assets to satisfy the unpaid balance of your bank loan. Since 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, particularly with the backlogs created by the Covid-19 pandemic), then a bank loan will usually still require you to make the required monthly installment payments, no matter that you have no means of doing so.
Since banks rely on your credit score and assets before providing you with a loan, their interest rates are lower than legal funding companies.
In contrast, 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. Lenders 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, due to the high risks in non-recourse financing. The interest rate on pre-settlement funding start at 28% a year up to 80% a year.
On the flip side, with legal funding you can get higher loan amounts than bank lending. Depending on the value of your potential settlement, borrowers get up to 10% of that amount. For example, if your case value is $1,000,000 you can get up to $100,000 is legal funds.
Banks won’t release more than $7,500 in personal loans or credit on average.
If you cannot work because of an injury that forms the basis for your lawsuit that is also requiring you to incur thousands or tens of thousands of dollars in medical bills, your financial difficulties may just be compounding.
While you will eventually be able to recover your total damages from whoever injured you, that does not solve your immediate problem. There may simply be no way for you to put off the inevitable day-to-day expenses we all pay as a part of everyday life.
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 that person may have irregular or no income and high expenses from ongoing medical treatment until their litigation resolves.
In this case, pre-settlement funding is often a better option. Pre-settlement funding offers no risk to plaintiffs because unlike a bank loan, you don’t have to pay the capital and interest rate or fees if your case ends up as a loss.
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.