If you’re involved in a lawsuit and struggling to make ends meet, pre-settlement funding (or lawsuit loans) can help cover living expenses, medical bills, and other urgent costs that arise during litigation. With this type of funding, you receive an advance against your pending settlement money. Compared to traditional financing, where you have to repay the loan on a monthly basis over a period of time, pre-settlement funding allows for a greater advantage in repayment because it is only based on the outcome of your lawsuit. This means that the lender only recoups what you borrow, plus any applicable fees and interest, from your future financial settlement, and you owe nothing if you don’t recover anything from the case.
While pre-settlement funding can be a lifesaver, its costs can add up quickly. In fact, it can potentially leave you with a hefty amount to pay once you receive your settlement payment. That’s why choosing a lawsuit loan company offering the lowest cost available is essential so you don’t pay more than you should.
Here, we will show you how to get the best pre-settlement funding cost, factors that can decrease or increase its costs, and what you can do to get the lowest cost possible for your advance.
How to Get the Best Pre-Settlement Funding Costs.
Since the overall cost involved in settlement loans can vary widely, understanding the interest (compounding or simple), fees, and rate caps can help you secure an advance that meets your financial needs without breaking the bank once your case reaches a settlement.
Here are a few things that can help you improve your chances of getting the lowest cost pre-settlement funding:
- A simple interest rate. A simple rate can increase your chances of getting a lower cost for your lawsuit loan.
- Capped rate – Rate caps can save you from incurring exorbitant repayment amounts by limiting the amount you repay to a certain figure regardless of how long your case takes to settle.
- APR or 6-month trench. An APR can help you get a fuller picture of what you’ll be charged yearly or every 6 months, allowing you to choose the best option.
Interest rates
A pre-settlement funding interest rate is the cost of borrowing money from a legal funding company. Depending on the lender, some companies will offer you cheaper rates than others. But do interest rates matter? The simple answer is, for the most part. While most people think a low interest rate will get them the cheapest pre-settlement loan, it is not.
A perfect illustration of how the best lawsuit loans are always determined by their low monthly interest rate is when looking at compound rates. With this type of interest rate, even if the rate starts at the lowest possible interest of 1.5% per month, the balance can significantly increase the cost over time. With compound interest, the interest is charged not only on the principal amount borrowed but also on any accrued interest. This means that the rate of 1.5% will increase and multiply, potentially making it the most expensive option.
To avoid the accumulating costs of compounding interest, carefully review the terms and conditions of any lawsuit loan agreement and choose a lender that offers simple interest rates. Funding companies that provide simple interest charge interest on the principal amount you borrow and do not charge interest on any accrued interest, which in return, can help you obtain the best deal on a settlement loan agreement.
Capped rates
While a lower simple interest rate may seem like the better funding option at first glance, a capped rate can make the cost of the pre-settlement loan the lowest in the long run. A capitalization rate is simply a provision in legal funding that limits the maximum amount of interest that a lender can charge you or the maximum amount of time you can get charged in interest. This means that if you take out a loan with a capped rate of, say, 100%, you will never have to pay more than 100% in the total cost of interest, regardless of how many years your case takes to settle. The interest simply stops at that cap.
On the other hand, the settlement loan with a lower rate but no caps means that you may pay more interest over time if something goes wrong with your case and it takes longer than expected to settle. For example, if you take out a loan with a 3% monthly interest rate but no cap, and your case takes four years to settle, you could end up paying significantly more in interest than if you had opted for a loan that caps (or stops) the rate on a specific time or rate.
Interest rate caps provide you with greater protection against the risks associated with accruing interest rates on settlement advances.
The APR (and 6-month trench)
APR (Annual Percentage Rate) is an important measure of the true cost of a lawsuit loan per year, as it takes into account not only the interest rate but also any other costs associated with the loan. Similarly, a six-month trench is the full cost of the loan over a six-month period.
Although the APR (and the 6-month trench) gives you a critical number that determines what your loan will cost each year (or every 6 months), how it impacts your repayment will ultimately depend on the approximate time of your legal settlement.
For example, let’s say a funding company offers you 3% monthly rate with a 2 year cap on a $2,000 loan, plus a $250 fee; and your case takes 5 years to settle, the overall cost of this pre-settlement loan could be your lowest option since you will pay $3,690 in total — the principal $2,000 plus interest of $1,440, plus $250 in fees, making its APR much lower.
However, in contrast, if you take out $2,000 legal funding with a rate of 3% simple per month (with no caps), plus a $250 fee, if the case takes 5 years to resolve, you will pay $5,850 over the lifetime of the loan — the principal $2000 plus interest of $3,600, plus $250 in fees, making its APR much higher.
Fees
A pre-settlement loan with a fee may initially seem like a more expensive option due to the additional costs involved. But sometimes it is not. Despite being charged a fee, when compared to other funding alternatives, if the loan has a smaller APR (associated fees and interest rates) and the rate is capped to prevent the lawsuit loan costs from spiraling out of control, this pricing might be the most financially viable option for plaintiffs.
Factors that Can Increase or Decrease the Cost of a Pre-Settlement Loan.
While lawsuit funding can be a great solution when you are struggling financially, like every other type of financing, its main drawback is cost. Let’s take a look at some factors contributing to increasing or decreasing pre-settlement funding costs.
The size of the advance
Logically, the more money a plaintiff borrows, the higher the cost will be in fees and interest rates. When borrowing a high amount, the overall cost of pre-settlement funding will increase due to the greater risk of large sums of money lending in return for future lawsuit payments. Similarly, the lower the funding amount, the lower the cost of your pre-settlement loan.
The length of the funding period
The length of the funding period directly affects the cost of pre-settlement funding because it is linked to the length of your case. As a general rule, the longer you have the funding, the more interest rates will accumulate. This is because the lender is taking on more risk by providing you with funds for a longer period of time, and they must cover that risk by charging higher fees and interest rates. So even if you have a capped rate, your loan will cost less if your case settles in a year than if it would settle in 2 years.
The complexity of the case
Lawsuits that are more complex and have a higher chance of going to trial may result in an increased interest rate in a legal funding contract. This is because the funding company is taking on a higher risk by funding a case that may not have a positive outcome, and they need to charge higher rates to compensate for that risk. Of course, the less complex the case, the better the odds of getting approved for the lowest interest cost.
The funding company
While legal funding can be extremely beneficial, borrowers must take caution before signing any agreement. Different lawsuit funding companies have different rates and fees. And some lenders offer exorbitant rates and fees, which could significantly reduce your settlement or award once it is paid out. To avoid getting preyed on, consider going with a lender, like Baker Street Funding, with an impressive record showing their advertised interest rates on the contract. Watch out for any pre-settlement funding companies that refuse to disclose the interest rate for your case—they should at least give you an estimated cost.
Additional funding
Additional funding can increase the cost of a settlement loan because it means that a consumer is borrowing more money from the case, resulting in increased interest and fees on the new money. Similarly, the longer the funding period, the more interest and fees will accumulate.
Inflation
Inflation can affect the cost of pre-settlement funding by reducing the purchasing power of the money that you receive from your settlement. If inflation is high, the amount of money that you receive may not go as far as it would have in a lower inflation environment. But when inflation is low, borrowing more money through lawsuit financing to cover living expenses and other costs decreases the overall cost of the funding in terms of fees and interest rates. In other words, low inflation indirectly decreases the cost of pre-settlement funding by increasing the value of the money received from the settlement.
The Federal Reserve
The Federal Reserve can indirectly affect the cost of pre-settlement funding through its monetary policy decisions. When the Federal Reserve lowers interest rates, it makes it cheaper for banks to lend money to each other. This can also lead to lower interest rates for legal funding as lenders may have lower borrowing costs from their investors. On the other hand, if the Federal Reserve raises interest rates, it can make borrowing more expensive for financial institutions and, in turn, for pre-settlement funding companies. For this reason, lawsuit loan companies may need to charge higher interest rates to compensate for the higher cost of borrowing money.
Competition
Competition among funding companies can be an important factor in determining the cost of pre-settlement funding for plaintiffs. When there are more funding companies competing in the market, lenders offer lower interest rates and fees to attract plaintiffs and gain market share. On the other hand, when fewer funding companies are competing in the market, they may charge higher prices because there are fewer alternatives available for plaintiffs.
Settled claims
Settled cases affect the pricing structure of a lawsuit loan agreement as it is often the most cost-effective option for plaintiffs with settled claims looking for financial support in their time of need without incurring high costs. Unlike pre-settlement funding, where the lender takes on the risk of the potential outcome of a legal claim, with a post-settlement loan, the funding company knows you won your case, and there is minimal risk involved for the lender.
Additionally, settled case funding is typically easier and faster to obtain than loans on pending lawsuits, as only the settlement agreement and a 5-minute conversation with the attorney are needed for approval.
Appeals
If a case is settled but on appeal, it could potentially increase the cost of a post-settlement loan. Since there is still a risk that the outcome of the case could change, funding companies charge higher rates on appeals than they would for post-settlement funding with no appeals or in a case where all appeals have been exhausted.
One time fees
A one-time fee of 30% could be a good option in legal funding if the plaintiff won’t need to borrow more funds in the future. However, since personal injury cases often take longer than expected to resolve and require additional financing during the process, many borrowers seek additional advances over time.
For instance, if you seek additional money and the funder only offers a one-time fee for the loan amount, you will have to pay another fee for additional funding, increasing its cost. This means that each subsequent advance incurs an additional 30% fee per transaction. All these costs soon add up, making it more expensive than other funders offering more flexibility that can lower the cost.
What You Can Do to Secure the Lowest Cost for your Settlement Loan.
If you want to save money on pre-settlement funding, here are various strategies you can use to reduce costs and get low cost financing.
Read the fine print
Before signing any funding agreement, make sure that you carefully read and understand all of the terms in the contract. Don’t be afraid to ask questions or seek clarification if there’s anything that you don’t understand. By taking the time to read and understand the funding agreement, you can potentially get convenient terms. This, in return, can save you money and stress over time.
Borrow only what you need
Only borrow the minimum amount to avoid accumulating unnecessary interest throughout your case and ultimately reduce the overall cost of the funding. The lower the amount you borrow, the lower the cost of your pre-settlement loan. When you take out a high amount, the loan cost will naturally be higher due to the greater risk when offering large sums of money in return for future lawsuit payments. This means that most lenders will charge a higher interest rate with no so favorable terms if your lawsuit advance is much larger than average.
Negotiate rates
While some lawsuit funding companies may have a fixed fee or a set rate, others may be willing to negotiate with you depending on the merits of your case or simply to match or beat a competitor’s rate. By negotiating rates, you can potentially save money on fees and interest, which can lower the amount you owe when it comes time to repay the advance.
Compare lawsuit loan companies
Finding a trustworthy funding company is crucial in securing the funding you need from your settlement at the lowest cost. Consider looking for a funding company with a good reputation. Avoid at all costs signing with lenders with hidden fees or markups. Be cautious of lenders that don’t tell you the approximate interest rate—make sure you have a clear understanding of potential costs before making any decisions. Most importantly, the rate cap and the APR or the 6-month trench should be clear. Understanding when the rate will cap and the total yearly or 6-month cost on your pre-settlement loan is the key to getting the lowest cost.
Consider the timing of your case
As mentioned above, the longer your lawsuit drags on, the more you’ll have to pay. Consider the timing of your case and try not to get funds too soon in the litigation process to minimize its overall cost.
Have your attorney present
Work with your attorney to help you get a better deal on lawsuit funding. Your attorney can help you negotiate with lenders and can advise you on what is best for your current situation.
If you are working with a broker, choose a reputable one
While it is difficult to make a blanket statement about the cost of brokers for pre-settlement funding because it can vary depending on the individual broker and the funding company they work with, some brokers may charge additional fees for their services, which can increase the overall cost of the funding.
However, while most brokers do not have the power to guarantee costs associated with pre-settlement funding, very few can leverage their industry connections to negotiate and set the best rates and terms on behalf of their clients. By working with a reputable and experienced broker, you can potentially receive a low cost in your funding agreement.
Calculate Pre-Settlement Funding Costs with a Lawsuit Loan Calculator.
Want to learn more about lawsuit funding costs? Our lawsuit loan calculator is an accurate online tool that helps plaintiffs estimate the potential cost of pre-settlement funding. It works by inputting the funding amount, the expected length of the funding period, and the estimated interest rate. Based on this information, the calculator will estimate the total repayment amount, including both the principal amount and the accrued interest.
While the estimated cost provided by a lawsuit loan calculator is only an approximation, it can be a helpful tool for plaintiffs better to understand the potential cost of a lawsuit advance and make more informed decisions when considering their options.
The Takeaway.
While pre-settlement funding can be a great option when you are struggling financially, the cost can increase or decrease depending on several factors. Although a lawsuit loan interest rate is typically one of the biggest factors that can determine these costs, other factors also matter in determining the cheapest terms. In fact, the key to getting the lowest cost option for your pre-settlement loan is to get a low APR with a cap on a simple rate – which can minimize how much you’ll pay back when you win your case.
Remember, the less the funding company is owed in repayment, the more money you will receive in your settlement check. As you consider your options, take a look at Baker Street Funding and find out if your case pre-qualifies for a lawsuit cash advance evaluation in just a few minutes.
We offer the lowest pre-settlement funding rates with simple interest and caps, allowing us to be one of the few funding options offering competitive pricing. Completing an application will quickly allow one of our funding associates to decide whether your case pre-qualifies for funds — no commitment required and no risk.
