Is Pre-Settlement Funding Compound or Simple Interest?

So, you’ve decided to take out a pre-settlement loan to help you cover your expenses during your lawsuit. If you got approved (congrats!). Now you have a funding contract that includes your pre-settlement funding’s interest rate—but wait a minute, the rate is kind of high.

Although you may have been approved for a pre-settlement loan, you are on the right track in wanting to understand what their types of interests and costs are. There are generally two types of interest for lawsuit loans, simple and compounding interest contracts. Here’s the scoop on ways these two interest rates differ.

Are pre-settlement loans compound or simple interest?

The majority of pre-settlement funding companies operate on compound interest. However, some legitimate lenders use simple interest.

Simple interest is calculated off your initial funding amount and is a fixed percent you get charged on the principal. On the other hand, compound interest is calculated on the amount you initially borrowed plus interest every month. 

Pre-settlement funding agreements with simple interest 

In basic terms, simple interest is the fixed amount of money you pay after receiving the pre-settlement cash advance, also referred to as the principal. 

A simple interest (or non-compounding) contract is viable for borrowers who expect their case will take a year or more to settle.

The interest due is only on the principal amount in this arrangement and is not added to the interest. 

To make financial sense, a pre-settlement loan company will choose to charge interest every three to six months. 

As the interest rate is a fixed percent, the rate of a simple interest pre-settlement funding contract is sometimes lower than the interest rates charged on compounded interest contracts depending on the terms of the agreement.

Simple interest example

Let’s assume that you take out a lawsuit loan for $10,000 under a simple-interest rate contract. 

You agree to an 18% interest rate that is fixed every six months according to the arrangement. 

You agree to pay a one-time fee of $800 after you win your case.

If you win your case in six months, you will have to pay $10,000 + $1,800 for the interest rate + $800 in fees. 

The total amount will be $12,600: your principal + interest + fees.

If your lawsuit settles and pays out in a year, you will be charged two times on the principal amount interest at the one-year mark along with the one-time fee, and the total costs will be $14,400. 

The total amount will be $14,400: your principal + interest + fees.

Pre-settlement funding agreements with compound interest

In compounding interest rate arrangements, the interest for pre-settlement funding is added ‘each month’ on the total balance (including interest + fees) and not on the principal amount alone. 

For that reason, your interest will increase with each passing month, along with the total balance. 

As the amount of interest is added to the total balance each month, the rate of interest in compounding contracts is more than the interest rate charged on simple interest contracts. 

A legal funding company will decide to charge the accumulated interest every six months. 

This option is most viable for consumers who believe their lawsuit settlement will pay in less than 6 months because the compounding interest starts lower. They quickly multiply after 6 months.

Compound interest example

Compound interest has a complicated calculation. For the sake of this article, we will use the easiest calculation.

Let’s assume you took a lawsuit loan of $10,000 with a monthly compounding interest contract. 

If the interest rate is 3%, you will be charged a 3% rate on the principal, 3% on the interest, and 3% on fees every month. 

Then your principal becomes a higher amount each month because it compounds; therefore, it multiplies. 

If your case is prolonged and takes one year to resolve, your final payment will multiply the initial amount. 

Depending on the lender’s terms of the lawsuit funding contract, your total compounding interest + principle + fees in 12 months could be $8,800 on a $10,000 lawsuit loan.

The total amount will generally go around $18,800: your principal + interest + fees.

Compounded interest contracts are unsuitable when lawsuits drag on for years since the interest on the total borrowed amount will mount over time, making it a dangerous choice. 

Are pre-settlement funding interest rates higher than bank loans?

When you borrow money from a bank, you commit to repay the loan monthly along with interest for the term the bank has assigned. Depending on your circumstances, a monthly payment can create further financial issues before your case (hopefully) settles. For instance, if you do not receive a settlement payment, you will still have to keep repaying the traditional bank loan. And if you default, the bank will come after your personal assets, trash your credit and make your life miserable even more.  

Pre-settlement funding or lawsuit loan rates are higher than those charged by banks because pre-settlement funding is a non-recourse financing arrangement that is not and does not work like a traditional bank loan. In this arrangement, you only have to pay back the loan if you win your case, and unlike banking institutions, lenders can’t seize your assets or damage your credit if you don’t settle your case in your favor and default on the lawsuit loan. Additionally, unlike banks, creditworthiness, and employment checks are not part of the settlement loan’s criteria.

Pre-settlement funding could be a viable option for consumers who need to keep fighting their legal battle without committing to bank loan payment commitments they can’t afford.

The takeaway

Understanding how interest rates on pre-settlement advances can work both for and against you is an essential step in helping you guard your final settlement.

Pre-settlement funding guarantees the protection of your personal assets and savings if you fail in your case, making them a worthy choice. However, signing a contract with a company that doesn’t have your best interest can also work against you.

If you do not want to wait for your final settlement payment, we can help. Baker Street Funding operates on the basis of consumer protection, trust, and mutual confidence. 

We mainly approve simple interest contracts with interest cap rates to protect our borrowers. 

Interest rate caps protect you from mounting interest no matter how long your case will take to resolve. Whether they are simple or compounded for the utmost risky cases, your interest will automatically stop in the third year from when you last funded your case.

Check out Baker Street Funding’s pre-settlement cash advances and get the interest rate you deserve. Or calculate your loan with our lawsuit loan calculator today. Apply to get started.