Car accidents, personal injury lawsuits, and even the tragic loss of a loved one due to negligence demand immediate financial assistance. Most Americans don’t have emergency funds to cover medical bills and legal expenses, and traditional bank loans might be out of reach due to low credit scores.
A lawsuit loan, also known as pre-settlement funding, can be a lifeline. But, like any financial tool, it carries inherent risks that must be carefully considered and understood.
How Does Pre-Settlement Funding Work?
A lawsuit loan is a non-recourse cash advance based on the expected settlement of your case. Unlike traditional loans, you don’t need collateral like a house or car. If you lose your case, you don’t have to repay the loan. However, interest rates can be steep, as they accumulate quickly if your case drags on.
Why Are Pre-Settlement Funding Rates Higher?
Banks offer lower interest rates because they conduct thorough risk assessments, by evaluating credit history, income, and assets. Legal funding companies, on the other hand, face higher risks since repayment depends on the lawsuit’s outcome. Therefore, they charge higher rates to offset these risks.
Is Pre-Settlement Legal Funding Regulated?
Regulation varies by state. Some states cap fees and interest rates at 36% per year or less, while others have no regulations at all. When rates are capped this low, it often makes no financial sense for legal funding companies to operate in these states due to high risks and low returns.
While these regulations are intended to protect personal injury victims, they actually benefit insurance companies. Insurers know that plaintiffs who are financially strained are more likely to accept lower settlement offers, preventing them from getting the full compensation they deserve. As a result, plaintiffs in states with strict caps often face a tough choice: accept a lower settlement or endure prolonged financial hardship.
What Are the Risks of Pre-Settlement Funding?
Here are some pre-settlement funding, also known as lawsuit loan, risks you should be aware of:
Hidden Charges
Some pre-settlement lenders charge hidden fees that can reduce your final proceeds by a whole lot. Look for vague terms in the contract and ask for a detailed breakdown of all charges. Always choose a reputable company that clearly lists its fees in the contract.
Compounding Rates
Compounding interest rates can quickly balloon the amount you owe. The longer your case takes to settle, the more interest multiplies on your loan. This financial pressure can force you to settle your case prematurely, potentially for less money than you deserve.
No Caps
Without a cap on the total amount repayable, your debt can grow out of control, especially if your case experiences delays. For instance, if your case takes 4 years to settle, this accumulating interest can leave you with a much smaller final settlement than you anticipated.
Limited Loan Amounts
Not all lawsuit loan companies offer large advances or additional funding. Depending on your case’s value and the lender’s policies, you might receive less funding than needed, leaving you still struggling financially and seeking additional lenders to buyout your loan.
Privacy Concerns and Data Security
If the funding company does not have strong data security measures, there is a risk that sensitive information about your case could be exposed. Insurance companies or opposing parties might exploit this information to gain an advantage in the lawsuit.
Impact on Future Financing
Excessive borrowing through legal funding can signal to future lenders that you might be financially irresponsible. This could make it harder to obtain legal financing for other needs later.
Dependency on Future Advances
You might become dependent on multiple advances if your case drags on. This dependency can lead to an endless cycle of borrowing, where each new advance only covers the interest of the previous ones, which diminishes your final settlement amount considerably.
Legal and Ethical Complications
If your attorney does not fully disclose all the implications of taking a lawsuit loan, or if the loan terms are not clearly explained, it could lead to ethical issues or disputes about legal advice provided. You need to make sure you fully understand the agreement and its implications.
Conflicts of Interest Between Attorneys and Funders
Some attorneys may have exclusive relationships with certain pre-settlement legal funding companies and may not sign contracts with other lenders offering better rates. This conflict of interest can hurt you, forcing you to either accept higher costs or seek new legal representation willing to work with your preferred lender.
Harassment and Aggressive Tactics
Some legal funding companies may use aggressive tactics to pressure you into signing contracts with them. This can include making baseless threats, such as claiming they’ll tell all other lenders not to fund you, or making late-night calls that disrupt your peace of mind.
The Takeaway.
Pre-settlement funding can provide you with financial support when you need it most, offering larger amounts than traditional banks without requiring collateral. However, it’s essential to understand the risks involved to protect yourself from predatory lending practices.
If you need further clarity on getting a lawsuit loan, contact Baker Street Funding at (888) 711-3599. We offer pre-settlement legal funding with capped, non-compounding rates, so that you know exactly what you’re getting into. Our non-recourse loans cover a range of cases, from personal injury to civil rights lawsuits.
See what we have to offer and get your case qualified for pre-settlement funding in just a few minutes. No credit or income checks.
