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 is secured by collateral. This type of secured debt holds you liable for borrowing money from them, and the lender has more power because recourse 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 lender’s freedom in this arrangement, recourse funding is more widely available than non-recourse and usually has a lower interest rate.
The lengths the lender can go for their money can include selling other assets like your house or your car and even garnishing wages.
Wage garnishing is a legal procedure where the lender can get a court order to have your employer withhold some of your wages to pay what you owe them.
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, the lender can go after any asset, while in limited recourse funding, the lender can only pursue assets named in the loan contract.
When you miss recourse loan payments, lenders can also report it to credit bureaus, negatively affecting your score and impeding your ability to get future loans.
Non-recourse funding is secured by collateral, just like recourse funding. The difference is that this type of funding favors the borrower. If your case is not successful, you cannot pay up the loan; therefore, your collateral is not worth the value of the debt. The lender 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 settlement, you and your attorney are liable for repaying the funding company once the proceeds of the lawsuit are paid to their trust account. In addition, if you win your case and your attorney does not pay back the money you owe, the lender can legally seize the debt from the loan’s collateral, and your attorney can lose their license.
Non-recourse funding versus recourse loans
Whenever you are looking at both options, getting one may depend on your immediate financial needs and status.
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 it.
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. This type of financing can enable borrowers to convert future settlements 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 bad credit score or being unemployed is meaningless to pre-settlement funding companies since the loan is non-recourse and the collateral is your future settlement.
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, lenders are more likely to give low-interest rates in recourse 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 low ball 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 from a borrower defaulting 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 risk 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 sizeable enough to cover the debt sufficiently. Many lenders have different means of calculating DSCR, a widely accepted formula.
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.