What Is a Lawsuit Loan?

Although most people would prefer to avoid taking out a loan, sometimes it's inevitable. Loans are available for a variety of purposes and through a variety of lenders.

While most people have heard of traditional loans for houses, cars, and higher education, they may not be aware that there are also loans to help you with a lawsuit. These are known as "lawsuit loans" or "litigation funding," where a lawsuit funding company provides a cash advance against the potential settlement. But given the uncertainty of a lawsuit's outcome and the potential high interest rates associated with these loans, one may question whether such funding is a good idea.

Read on to learn why someone would take out a loan while involved in a lawsuit, the downsides of litigation financing, and other legal funding alternatives.

Why Take Out a Lawsuit Loan?

A lawsuit loan, sometimes called "pre-settlement funding" or a "pre-settlement lawsuit loan," is basically an advance against a future award or settlement. It's usually used by someone who is in the middle of a lawsuit with the potential to receive money but who needs cash now to keep the lawsuit going.

While they can be used by plaintiffs in a variety of different types of lawsuits, they're most common in medical malpractice or personal injury lawsuits. This is usually because plaintiffs who have been injured need the money to cover medical bills or lost income.

The use of lawsuit loan companies provides a way for people to navigate their financial situation during the legal process. It helps them address immediate needs while awaiting a potential settlement.

How Does Legal Funding Work?

Once a plaintiff files a lawsuit, they can apply for a loan with a lawsuit lending or legal funding company. The company will evaluate your legal claim to figure out how much you could win or receive in the event of a settlement. The legal funding company will then offer a sum of money as a "lawsuit cash advance" or "pre-settlement fund." In exchange, you agree to pay back the loan, with interest, in addition to a funding fee.

The payment usually isn't paid while the lawsuit is pending. Instead, the repayment is made from the judgment or settlement proceeds. It's essential to carefully consider the terms and conditions of such arrangements with legal funding companies before choosing a lawsuit cash advance.

The Downsides of Lawsuit Loans

The first downside to a pre-settlement loan is that not all types of lawsuits qualify for one. Since a lending company will only be paid if a plaintiff wins or settles, it will only want to offer a loan when it looks like a case will be decided in the plaintiff's favor.

Another downside is the fact that pre-settlement loans can be expensive. Although they're only paid back if the plaintiff gets a successful outcome, the money that will be due will be the principal plus interest and attorney's fees. Interest for these types of loans can run up to 60% per year, and considering how long lawsuits can take before a resolution, this can add up to a significant amount.

Finally, while most types of loans are regulated in order to protect consumers, pre-settlement loans aren't regulated. Since there are few restrictions on the amount that companies can charge and the terms that must be disclosed, it's difficult for consumers to compare loans and companies and make informed decisions. Lack of regulation also means that it can be difficult to find a reputable lender.

Alternatives to Lawsuit Loans

It's understandable why legal funding may be attractive to someone who needs money while involved in a lawsuit. But, considering the downsides, it may not be a good idea to take one out. Luckily, some alternatives may be available for those who need money during a lawsuit.

While a contingency fee agreement with an attorney is helpful to keep costs down, it doesn't provide funding for those who are losing income or those who have medical bills hanging over their heads. To help cover living expenses, plaintiffs do have other resources available. For example, they could always apply for disability or pursue a claim for insurance money.

It's also possible to borrow money from friends or relatives. Borrowing money against the equity in a home or 401(k) account is also possible. But this can be risky since the inability to pay the loan back in a timely fashion can put your home in jeopardy.

Have Additional Questions About Lawsuit Loans? Talk to a Lawyer

If you have more questions about legal funding, it's a good idea to get in touch with a local consumer protection attorney. An attorney can provide legal advice based on your unique situation.