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 loans for houses, cars, and higher education, they may not be aware that there are also loans to help you with a lawsuit. But, considering the uncertainty of the outcome of a lawsuit, are lawsuit loans a good idea?

Read on to learn about why a person would take out a loan while involved in a lawsuit, the downsides of using one, and other legal funding alternatives.

Why Take Out a Lawsuit Loan?

A lawsuit loan, also sometimes referred to as a "pre-settlement loan," is basically an advance against a future award or settlement. It's usually used by someone who's in the middle of a lawsuit with the potential to receive money, but needs cash now to keep the lawsuit going. Although it can be used by plaintiffs in a variety of different types of lawsuits, they're most common in personal injury lawsuits. This is usually because plaintiffs who have been injured need the money to cover medical bills and/or lost income.

How Does Legal Funding Work?

Once a plaintiff files a lawsuit, they can apply for a loan with a lending company. The company will evaluate your case to figure out how much you could win or receive in the event of a settlement. The lending company will then offer a sum of money and, in exchange, you would agree to pay back the loan, with interest, in addition to a "funding fee." The payment is usually not paid while the lawsuit is pending; instead, the payment is made from the proceeds of the settlement or judgment.

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 in the event of a successful outcome for the plaintiff, the money that will be due will be the principal plus interest. Interest for these types of loans can run anywhere between 27% 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, there may be some alternatives available for those who need money while in the midst of 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, although 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, or other consumer protection issues, it's a good idea to get in touch with a local consumer protection attorney who can provide information based on your unique situation.