Car accidents and personal injury lawsuits, among other similar unpleasant events, including the death of a loved one due to an unsafe work environment and someone else’s negligence (wrongful death), demand instant financial assistance to fund medical bills and other expenses.
In fact, most Americans are not getting paid enough to have emergency funds to fall back on such short notice, and friends and family may not have enough to help during a legal battle.
Beyond that, getting approved for traditional bank loans may not be the best option because of the cumbersome paper works and overly complicated and daunting application process. In addition, if your credit score is low and you have no way of showing you can pay the loan, a bank will automatically reject your application.
A lawsuit loan (another word for pre-settlement funding) can be an important financial tool if you can find one from a reputable company at a reasonable interest rate.
While the benefits of lawsuit loans outweigh the cons, pre-settlement legal funding still carries certain risks that every plaintiff seeking them must be aware of.
How does pre-settlement funding work?
A lawsuit loan is not a traditional bank loan. A loan on the future proceeds of a lawsuit is a type of non-recourse lending instrument for plaintiffs offered through legal funding companies that carry higher rates than conventional loans. A more appropriate adjective is a non-recourse cash advance because the lender is giving you (the plaintiff) a portion of the compensation or settlement package while your case is ongoing, pending, or judgment is taking too long, which you are not liable to pay unless you get compensated.
As a result, lawsuit financing is paid back with interest and fees once you win your case, and unlike banks, you don’t have to put up any asset like a car or a house as collateral to qualify for the funds.
Non-recourse means you only pay back if and only if you successfully recover monetary award or settlement on the case. Otherwise, the funding company will bear the burden of the loss while you walk away without paying both the principal and interest.
Unlike some disinformation from other funding companies, lawsuit loans, pre-settlement loans, litigation financing, and pre-settlement legal funding have the same exact meaning. They are not loans in the traditional sense.
Why is the pre-settlement legal funding rate higher than a bank loan?
Many states in the United States have no regulations in place to curb and put a lid on legal funding agreements. In some states, where there is some regulation to protect plaintiffs, the lender can’t take up more than 20% of the amount borrowed from a settlement — including fees and interest.
It is important to understand this risk-free funding option for plaintiffs is extremely risky to lenders, and some have entirely stopped funding in these states. These laws essentially treat legal funding companies as if they were basing the loan on credit, income, and assets, leading them to stop funding lawsuits altogether. These laws also hurt the plaintiff and advantage insurance companies since the financially burdened victim will have no choice but to take the first lowball insurance offer.
When a bank gives you a low-rate loan, it means you can pay it back monthly. However, with legal funding, investors lose money every day when plaintiffs don’t recover compensation since they can’t come after you if you default.
This is why the rate is higher than banks due to the extremely high risks involved in lawsuit proceeds investments. The money you get is non-recourse, meaning the loan is not based on assets, income, or credit.
But this doesn’t mean that lenders should charge predatory rates exceeding more than 100% on the borrowed amount for the life of the loan, no matter when the case resolves.
For example, in Nevada, where pre-settlement legal funding is regulated, a company can charge up to 40% of the loan principal per year, including interest and other fees. Which outweighs the risks of investors’ loss in cases they invest in. That means if you qualify for a lawsuit loan of $5,000 at a 40% interest rate in Nevada, and your case settles in one year, you will end up paying $5,000 you took out plus $2,000 in charges. A total of $7,000.
What are the possible risks of pre-settlement legal funding?
Hidden fees, compounding rates, and no caps on pre-settlement funding can cause you to lose a large chunk of your award. Consider a legitimate lawsuit loan company to avoid major risks.
1) Hidden Charges
Because legal funding is largely unregulated in most states in the US, there is no benchmark for how much interest is charged — different settlement loan companies charge different rates. The lax regulations also pave the way for some lending companies to include extra charges on the interest rates, especially when they claim that they don’t charge “fees.” As such, you are mostly repaying high interests due to hidden costs like administration fees. These will eventually take a deep bite into your proceeds when it gets paid. Only the best lawsuit funding companies will place their fees on the contract and won’t exceed an annual percentage rate (APR) of 41% per year.
2) Compounding Rates
Compounding interests is another contraption you must avoid. The last thing you want to do while dealing with the pain and stress of your personal injury is pay interest on interest. When you get compounding interests, it means you are not only going to repay the principal plus the initial interest. You are now going to pay additional interest on the initial interest due on the principal each month. Imagine how much your settlement (or award) amount will be left after repaying accumulated multiplied interest rates and charges for the life of your loan.
If a lender charges compounding interest rates on a $5,000 lawsuit loan, the first compounded figure for one year will be $9800.
3) Interest Rates With No Caps
Be careful when looking at annual percentage rates (APR) on legal funding. Don’t focus on your yearly rate instead, look at the total amount you will pay on the capital over the life of the loan.
Although a non-Recourse Consumer Funding Act was passed in 2015, where legal funding companies in the US are backed by the law to charge up to 80% of the settlement award, a legitimate lender will have a cap on their rates.
Capped rates protect you from paying exorbitant interest charges if something goes wrong with your case and your claim takes longer than 2 to 3 years to resolve. Your interest will not accrue after the time cap by capping the rate. You also will be paying only 2-3 years in interest rates which translates to no more than 20% of your total compensation, including the principal lent to you. That’s a better measure of the advance ultimate cost even if the laws cap it at 80% of your settlement or award.
How can I get a risk-free lawsuit loan?
Before applying, you should do your due diligence by researching the lender. A legitimate lawsuit funding company is transparent in its dealings. They also don’t have hidden charges to add to your financial burden and offer non-compounding interest rates with caps.
You should have your lawyer comb through the offer and advise you on your best course of action. They can get you a legal funding company such as Baker Street Funding that offers risk-free loans with non-compounding rates and caps. In addition to operating best industry practices, Baker Street Funding offers expert consultations to plaintiffs without demanding signatures of approvals or harassment calls to sign a contract.
To get a risk-free lawsuit loan, apply with Baker Street Funding, where you will provide your attorney’s contact address and brief information about your case. Once the application is submitted, it will be assessed by a finance team who will contact you and your lawyer for case qualification. If your case qualifies for the advance and your attorney responds fast and provides the required information, you can get the agreed loan amount approved and paid within 24 hours. Think same-day lawsuit loans.
Pre-settlement funding generally offers much higher borrowing limits than traditional banking institutions, typically between $1,000 and $1,000,000. There is also flexibility in how you can spend the funds. And there is no need to use your assets like a house or a car as collateral, and there are no credit or income checks, nor do you risk losing your assets should you default on the loan if you lose your case.
However, top on the list of the risks involved with pre-settlement legal funding is high compounding interest rates and additional hidden charges. That’s because there is a lack of transparency from unethical entities. And since the industry is unregulated, gimmicks and “sharks” are making their way into the industry and ripping unsuspecting plaintiffs off their settlement or jury award when the case concludes.
If you need further clarity on getting a loan from your lawsuit proceeds, contact Baker Street Funding. You will get an unbiased assessment of your legal proceeding and pointers on what offer is best for your case. Our lawsuit loans are not restricted to car accidents and personal injury alone. You can also apply for funding if you are involved in a civil rights lawsuit or an employment dispute.
While the settlement or trial award loan is for you to spend as you wish, you should manage your finances wisely and take out only enough to meet your needs.
Curious to know if a Baker Street Funding pre-settlement advance is the right risk-free option for you? See what Baker Street Funding has to offer and get your case pre-qualified in as little as ten minutes.