In general, most loans can be a bit complicated to understand as you need to know your credit score, calculate your income, and figure out how you would repay the loan over time, among other tasks.
If you are thinking of getting either a recourse loan or non-recourse funding, it is important to first understand what type of financing you are obtaining and what your obligations are.
Whatever choice you pick will determine the level of freedom and risk you are taking on. However, not everyone is eligible for both types of loans. Let’s run you through both concepts, recourse and non-recourse loans, and help you understand your options.
Recourse Funding
Recourse funding is secured by collateral. This type of secured debt holds you liable for borrowing money from them, and the lender or the bank have more power because these type of loans favor them. In the event you default on the loan, the lender can recoup the loan balance by seizing your collateral and, when necessary, additional assets.
Due to the bank’s freedom in this arrangement, recourse funding is more widely available than non-recourse and usually has a lower interest rate.
However, the lengths that banks can go to recover their capital can include selling other assets like your house or your car, trashing your credit and even garnishing wages. For instance, wage garnishing is a legal procedure where the bank can get a court order to have your employer withhold some of your income to pay what you owe them. And if you miss loan payments, your lender can also report it to credit bureaus, which in turn, negatively affects your score and impedsyour ability to qualify for future loans.
This system might seem extreme, but there are limits to it. It all depends on the type of recourse loan you got. In full recourse funding, as mentioned, your bank can go after any asset. Conversely, in limited recourse loans, the financial institution can only pursue assets named in the loan contract.
Non-Recourse Funding
Non-recourse funding for lawsuits is secured by future collateral which is your potential legal settlement. This type of funding, also known as pre-settlement funding, favors you, the borrower. If your case is unsuccessful, you cannot pay up the loan; therefore, your collateral is lost and not worth the value of the debt. The lawsuit lending company will not touch your other assets because the ‘collateral’ does not cover the value of the debt.
Once you take out money from your pending lawsuit settlement or judgment, you and your attorney are liable for repaying the legal funding company once the proceeds of the lawsuit are paid to their trust account of your lawyer.
In addition, if you win your case and your attorney does not pay back the money you owe, the funding company can legally seize the debt from the loan’s collateral, which in this case is your legal compensation, and your lawyer can lose his or her license.
Non-Recourse vs. Recourse: a Comparison
Non-recourse funding
If you are open to strict approval requirements, higher interest rates, and the fact that these loans are not offered everywhere, a non-recourse loan from your litigation could be convenient for you. While this might seem like the best option, you should know that banks do not offer non-recourse lawsuit loans.
Some of the key differences are:
- Risk-free for the borrower without monthly payments. There is no risk on your end and no monthly payment schedules. If you do not win your case, you do not have to pay back the money—at all.
- Higher interest rates. Since non-recourse pre-settlement funding is extremely risky to lenders, the interest rates will automatically be much higher than traditional recourse loans. If the loan rate is a big factor for you, you would be better off with a traditional bank loan that you can get approved and pay monthly.
- 24-hour loan approvals. Legal financing can enable you to convert your future settlement into much-needed cash on-hand in a matter of 24 hours from when your lawyer provides the required documentation from your litigation.
- There is no employment verification or credit checks. Having a bad credit score or being unemployed is meaningless to pre-settlement legal funding companies. Lawsuit loans are non-recourse, and the collateral is the future financial recovery from your case.
Recourse loans
A recourse loan could be a good option depending on your circumstances. For example, auto and credit card loans are usually recourse and provided to those who can afford to pay them on a monthly basis.
Some of the key differences are:
- Lower interest rate. Thanks to the reduced risk to lenders, they are more likely to give low-interest rates in recourse loan arrangements. So, if the interest rate is a big factor for you, you would be better off with this type of loan.
- Credit score checks. If you like the idea of a recourse loan, ensure your credit history is good so you get approved for it.
- Stable income. If you have a steady income and the ease to pay your loan every month, a recourse loan could be an enticing option for you.
Criteria for recourse and non-recourse loans
General criteria for getting non-recourse funding from your pending settlement
- Your case has to be strong enough to win. If your claim is solid and worth over $50,000, you can more than likely get approved for non-recourse funding and avoid the hassles that come with getting a recourse loan.
- Your attorney has to be available throughout the process. Your attorney must provide more in-depth case information and a professional opinion for the lender’s underwriters to use. Plus, the lender is repaid by your attorney through their trust account when your case is successfully resolved.
- You must live in a fundable state. Non-recourse legal funding is only provided in selective states due to government rules and regulations indirectly pushing funding companies not to fund those states. These laws ultimately give preference to insurance companies, leading accident victims to take lowball settlements out of desperation.
General criteria for getting a recourse loan
While the following requirements may seem excessive, from the bank’s perspective, they must incorporate them to protect themselves if you default on the loan. Some of the criteria are:
- Good credit score. The first is that you should have a good credit score. A credit score that is a bit lower or higher than average would cut this one. Lenders prefer someone they can count on to repay the money they owe because it gives them more security.
- Stable source of income. If your income is unsteady, you can say goodbye to this option. Most lenders will not accept such risks when they are not sure you can responsibly pay them back.
- At least 1.25 debt service coverage ratio. This ratio shows the lender that your steady income is sizable enough to cover the debt sufficiently.
Non-Recourse Pre-Settlement Loans From Baker Street Funding
The only reason why you would be worried about whether you can get approved on a recourse vs. a non-recourse loan is if you cannot pay back the loan. If you don’t have much of a choice, remember that analyzing your financing options is the first step to making the right decision for your own unique situation. Carefully weigh the benefits and drawbacks of the option you are presented with.
If a non-recourse loan on your pending lawsuit is what fits you, you can look away from banks and see if you qualify by applying for a lawsuit cash advance from Baker Street Funding today.
Pre-settlement funding is a safe financing option where you don’t have to jump through all those hoops like in traditional lending methods. With this option, you are not bothered with credit or employment checks, and you will fully enjoy the benefits discussed above.
Baker Street Funding offers non-recourse, fixed, and low-interest rate lawsuit loans of $1,500 to $2,000,000+, and you can complete the application entirely online. There are no monthly payments, and the interest rates are lower than other lawsuit loan companies. Applying takes just 2 minutes, with no commitment.
Also, since our rates are non-compounding with a three-year cap, your interest rates will end in 3 years at a fixed rate no matter when your case settles.
Learn more about pre-settlement loans offered by Baker Street Funding by applying today.
