Are you in the middle of a personal injury lawsuit and finding it hard to manage your finances while waiting for a settlement? Pre-settlement funding could be the financial lifeline you need to cover immediate expenses.

However, there are common mistakes that people make when choosing this type of funding, and these errors can have long-term consequences on your financial future. Understanding these blunders and how to avoid them can help you make informed decisions that protect your interests.

Understanding Pre-Settlement Funding

Pre-settlement funding is designed to provide financial relief while you wait for your legal case to settle. This non-recourse loan gives you access to cash based on the expected outcome of your lawsuit. Unlike traditional loans, you only repay the funding if you win your case. It’s a practical option for covering medical bills, rent, and other living expenses when you’re unable to work due to your injury.

Nonetheless, while pre-settlement funding can be a valuable resource, it’s important to choose wisely. The wrong decision could expose you to higher costs and financial strain, which can undermine the benefits of your settlement.

Legal Funding Mistakes to Watch Out For

To set you on the right path, we’ve put together some common mistakes you should avoid when looking for legal funding.

Mistake 1: Failing to Compare Legal Funding Options Thoroughly

The pre-settlement funding industry is not uniformly regulated, which means that not all companies adhere to the same standards of transparency and fairness. For this reason, you should conduct thorough research and compare lenders before making any decisions.

What Should You Look For?

Reputation: Start by looking for lenders with a strong track record. You can verify this by reading customer reviews, checking ratings on platforms, and searching for any red flags, such as unresolved complaints or legal issues. A company with a good reputation is more likely to offer transparent terms and treat you with respect throughout the process.
Transparency: A trustworthy lender should initially explain how their funding works. Watch out for lenders who are vague about their terms or dodge your questions. Getting an approximate annual cost when you first apply is way better than none at all.
No Shady Fees: Some legal funding companies might throw out “one-time fees” that look great at first glance, but there could be extra costs hidden in the fine print. Make sure to ask for a full rundown of the loan “fees” before agreeing to anything. They usually hit you with a 25% to 30% one-time fee every time you take out pre-settlement funding, so it’s good to know upfront.
Client Communication: The way a company talks to you says a lot about their professionalism. Notice how they handle your questions. Are they quick to respond, respectful, and informative? If a company takes the time to answer your questions thoroughly and promptly, they’re probably more reliable.
Experience in Your Type of Case: Consider whether the lender has experience dealing with cases similar to yours. Some lenders specialize in particular types of lawsuits, such as personal injury or medical malpractice, and may offer better terms or a quicker approval process for these cases.

Quick Tip: Transparency isn’t just a nice-to-have; it’s imperative for securing a fair deal. Always opt for providers who are upfront about their terms and willing to provide clear, detailed information about every aspect of the funding process. If something doesn’t feel right or if a lawsuit funding company is hesitant to disclose details, it’s a red flag to look elsewhere.

Mistake 2: Failing to Understand the Total Cost

One of the biggest pitfalls of pre-settlement funding is not understanding the total cost involved.. People often get caught up in just looking at the initial interest rates or fees and forget about how these add up ‘over time’. What seems like a small percentage now can quickly turn into a bigger debt on your final settlement if you don’t pay attention.

Breaking Down the Costs:

Interest Rates: Pre-settlement funding usually has higher interest rates than traditional loans. Sure, a low interest rate might look tempting, but it’s imperative to know if it’s simple or compounding. A compounding rate can quickly increase the amount you owe—especially if your case drags on longer.
Fees: Fees aren’t always bad, especially if you’re looking at a lower APR when comparing offers. Just make sure you get all the details before signing anything. These can include administrative fees, origination fees, and sometimes even fees for processing payments.
Caps on Interest: Some reputable legal funding companies offer caps on how much interest can accrue, usually over a period of time, such as three years. For instance, if your case takes longer than anticipated, these caps can prevent interest from ballooning out of control, protecting you from owing an excessively large amount.
Repayment Terms: Understand how and when repayment will occur. Typically, your attorney handles the repayment directly from your settlement once your case concludes. However, if your case drags on or if you receive less than expected, the repayment could take a substantial portion of your settlement.

Quick Tip: Ask the legal funding provider to give you a clear estimate of the total cost over the expected duration of your case. This should include the principal amount, all applicable fees, the interest you’ll accrue over time and when the charges stop.

Mistake 3: Overborrowing From Your Lawsuit

Overborrowing is another common mistake that can leave you with far less money than anticipated once your case settles. While it might be tempting to take a large cash advance to ease your financial burden, borrowing more than you need can backfire.

The Risks of Overborrowing:

Reducing Your Final Settlement: The more you borrow, the more you’ll have to repay from your settlement. If your case settles for less than you expected, a large portion—or potentially all—of your settlement could go toward repaying the advance, leaving you with little to nothing.
Increasing Financial Pressure: Borrowing more money than you actually need can quickly deplete your available funding, leaving you with a financial headache if your case takes longer to settle. Once you’ve maxed out your funding, you may find yourself without enough money to cover ongoing expenses, which might pressure you into accepting a lower settlement just to get by.

Quick Tip: Before you say yes to any offer, take a good look at your urgent financial needs. Make sure you cover emergencies like past-due medical bills, rent, or utilities, and resist the urge to borrow more than you need. Once you’ve calculated what you need, set a firm borrowing limit. Stick to this amount, even if you’re approved for more. This discipline will help you preserve as much of your settlement as possible.

Mistake 4: Not Consulting Your Attorney

Failing to consult with your attorney before securing pre-settlement funding is a mistake that can have far-reaching consequences. Your attorney has a deep understanding of your case and can provide critical advice on whether legal funding is necessary, and which lenders are reputable.

Why Your Lawyer’s Advice is Important:

Legal Insight: Attorneys have experience dealing with legal funding and can identify terms in the contract that might be unfavorable or hidden.
Negotiating Better Terms: Sometimes, having your attorney involved in the process can get you better terms. Lenders may be more willing to negotiate with attorneys.
Protecting Your Settlement: Your attorney’s main goal is to look out for your interests during the lawsuit. He or she can guide you on how pre-settlement funding might help or affect your decisions in settlement talks.

Steps to Take

Involve Your Attorney Early: Before even approaching a lender, discuss your financial situation with your attorney.
Key Questions to Ask Your Attorney: Will this advance affect my case? Are the terms of this funding agreement fair?
Review the Agreement Together: Don’t sign a funding agreement without letting your lawyer take a look first.
Consider Alternative Solutions: Your lawyer might have some alternative funding options that are less costly. It’s a good idea to check these out before jumping into pre-settlement funding.

Ready to Choose the Right Legal Funding Partner?

Making smart choices about pre-settlement funding is key to safeguarding your financial future settlement. To avoid hiccups, make sure to research your lender, understand the costs, borrow only what you need, and talk to your attorney. By avoiding common oversights, you’ll get the support you need without putting your settlement at risk.

Remember, the key is to make decisions that prioritize your well-being both now and after your case settles. And, if you’re considering pre-settlement funding, let Baker Street Funding guide you toward a solution that fits both your current needs and long-term financial stability. Apply today for a stress-free, transparent funding experience.