Pre-Settlement Loans vs. Legal Funding: Decoding The Myths

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Pre-Settlement Loans vs. Legal Funding: Decoding The Myths

If you have been injured and are waiting for a settlement, you may be considering legal funding or a pre-settlement loan to help you get through your litigation. However, there are numerous of misleading information about pre-settlement loans and legal funding making the rounds, particularly about how they are different when in fact, they are very similar. 

With that in the pipeline, separating the myths from reality can help you determine whether a settlement loan and the lender you choose are a good fit for you.

Myths related to settlement loans and legal funding

If you are new to the legal funding industry, you may be nervous about applying for a loan on your case. Due to claims that lawsuit loans and pre-settlement funding are very different products, you may be wondering if you will have to pay back the advance if you lose your case. You may also be worried about high-interest rates or monthly payments. There are so many myths associated with settlement loans that often deter plaintiffs struggling to make ends meet from applying for one.

Here is a list of five settlement loan myths.

Myth #1: Settlement loans are different from legal funding.

The most common misconception about settlement loans is that a lawsuit or settlement loan might sound like the same concept as pre-settlement legal funding, but they are very different. However, this is simply not true. 

In fact, both settlement loans and legal funding are considered non-recourse loans in the litigation funding industry. Also called non-recourse debt, a settlement loan is a loan for which no one is personally liable for repayment. This means that if the borrower loses their lawsuit, they do not have to repay the loan. So, despite the claim that legal funding is different than settlement loans, both terminologies fall under the non-recourse loan category, making them the same type of loan.

Myth #2: The IRS classifies pre-settlement funding as non-recourse debt but not lawsuit loans.

This is simply another myth. While there may be attempts from very few lenders to deceive consumers into thinking lawsuit loans are risky and pre-settlement legal funding is non-recourse, as categorized by the Internal Revenue Service, this misconception continues to fail to hold up. The IRS never mentions that lawsuit loans are recourse debt. Both types of lending are classified as non-recourse debt in the eyes of the IRS. In fact, the Internal Revenue Service (IRS) classifies all debt into two categories: recourse and non-recourse. This means that both settlement loans and pre-settlement legal funding are considered non-recourse debt by the Internal Revenue Service because the borrowers are not personally responsible for repayment should they lose their case or the settlement offer come lower than expected.

That said, the claim that pre-settlement legal funding is non-recourse debt, but settlement loans are not, is entirely false.

Myth #3: Settlement loans are debt obligations that can leave borrowers in a worse financial situation.

This claim that settlement loans are debt obligations that leave borrowers with a financial burden is too much of a blanket statement to be true, as this is not how the legal finance world works. A lawsuit loan is, in fact, a non-recourse loan, just like pre-settlement legal funding. Rationally, you will not be burdened by your financial situation if you lose your lawsuit because you do not have to pay back the amount you borrowed, and your obligation to repay the loan would be void. You only pay back the money from a lawsuit loan company if you win your case.  

Myth #4: A lawsuit loan is like any other loan that can have you making monthly payments for years and up to 2 to 3 times the amount borrowed, and it may affect your credit score. 

Another common misconception about lawsuit loans is that borrowers who opt for these loans must go through credit checks, pay back two or three times the amount they borrowed, and are often locked into monthly repayment periods, even if they lose their lawsuit. 

Ironically, this myth ignores the SEC, FINRA, and CFPB regulations on traditional loans. In reality, if settlement loans were actual loans, they would be subject to advertising regulations set by the Securities and Exchange Commission (SEC) or the Financial Industry Regulatory Authority (FINRA), and the Consumer Financial Protection Bureau (CFPB). This means that settlement loan companies would not be able to make false or misleading statements about the type of loans they provide, the interest rates would be regulated at the bank level, and they would be subject to severe regulations.

Myth #5: Pre-settlement legal funding is better than a lawsuit loan.

This is another of the biggest lawsuit loan myths that are easy to believe, but it is entirely wrong. In fact, pre-settlement legal funding is not better than lawsuit loans because both offer the same loan structure to plaintiffs who need financial assistance while awaiting their settlement. Since both are non-recourse, these advances have no risk and provide equal liability protections for borrowers. Therefore, claims that one is a better product than the other are simply not true.

Alternatively, even, a leading information resource on settlement funding, considers the terms “lawsuit loan” and “legal funding” to be interchangeable, demonstrating that both terminologies refer to non-recourse loans.

The takeaway

Confusion is common when it comes to settlement loans, so don’t buy into myths. Remember, the main difference between lawsuit loans and pre-settlement funding is the company that provides the funding and the transparency they show in their advertisements.

Although these lenders may try to mislead consumers into thinking that these funding products are vastly different from one another, if lawsuit loans were actually considered loans, they would be subject to regulations by the: 

  • Securities and Exchange Commission (SEC)
  • The Financial Industry Regulatory Authority (FINRA)
  • Consumer Financial Protection Bureau (CFPB)

These organizations have strict guidelines on the language and disclosures that must be included in any advertisement for a loan product, including interest rates, fees, and repayment terms. However, since a lawsuit loan is not considered a loan, it is not subject to these regulations.

Despite the few funding companies that do not accurately represent the nature of their services in the pre-settlement funding industry, consumers should be wary of any lender that misleads or provides false information and seriously consider alternative options for legal funding.

Although consumer legal funding is also known as a lawsuit loan, it is not a loan in the traditional sense because you don’t repay anything back if you lose your case. All in all, lawsuit loans and pre-settlement legal funding are two sides of the same coin that can help you get financial assistance, but it is up to you to choose the right lender.

If you have a pending personal injury case, you might need cash immediately. Fill out our application online and apply for a Baker Street Funding lawsuit loan. A representative will help you know the correct facts and decide whether funding your case is the right choice. Apply today.


Are lawsuit loans and pre-settlement funding very different products?

 No. While much of what is written online about this funding option is misleading at best, the truth is that both pre-settlement funding and lawsuit loans are the same non-recourse debt product. 

Does The New York Times support the myth that lawsuit loans leave borrowers worse off than pre-settlement funding?

No. The NY Times article actually discusses settlement loans or lawsuit loans in general as non-recourse, and they do not specifically mention pre-settlement funding. Legal funding companies using this article to discredit all lawsuit loans are also discrediting pre-settlement funding, which is highly misleading consumers to believe something the NY Times never said.

Can a lawsuit loan have you making monthly payments for years, and will it affect your credit score? 

Like pre-settlement funding, a lawsuit loan does not require monthly payments. You only pay back the loan when you win your case, and it does not affect your credit score because it is not checked or reported to credit agencies.

At Baker Street Funding, we give you the inside scoop on pre-settlement funding by covering a variety of ... financing and legal topics to help you made the best financial decision for you and for your case. Our experts break down complex ideas in a way that's easy to understand so you can stay informed on current trends as well as tips and fact checked information by the CEO and founder, Daniel Digiaimo. Furthermore, Despite its name, consumer legal funding is not a loan. If you don't win your case, no payment needs to be made back. To avoid confusion and simplify matters on, we'll use the word "loan" throughout this article.

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