You can’t avoid the television commercials and radio jingles offering you a quick payday. They’re the ones telling people who have recently won a legal or insurance settlement that they don’t have to wait for the paperwork to go through – they can get their hands on that money immediately (cue fireworks and people singing and money flying through the air). Although it sounds convenient, borrowers often find themselves with untenable service and finance charges.
Another version of this is called “pre-settlement funding.” Per Annuity.org:
A lawsuit advance, also called pre-settlement funding, grants plaintiffs advanced access to the money from a court award before the court makes its final decision. These financial products are controversial and should be approached with careful consideration, especially in states where they’re not strictly regulated.
They also note, “Traditional banks and credit bureaus do not give loans based on expected settlements. However, a settlement advance company will.”
How does pre-settlement funding work?
Per the National Law Review (NLR), pre-settlement funding goes by many names – litigation funding, car accident loans, and lawsuit loans. However, they all mean the same thing. When an individual is in the midst of a complex and time-consuming personal injury case with the likelihood of a high settlement or verdict, a lawsuit loan can provide them with upfront funds to provide a financial cushion.
When the lawsuit is resolved in favor of the plaintiff, the lender receives a portion of the proceeds. If the plaintiff loses their case, they won’t have to pay the lender back.
Although this sounds simple and above board, many of these lending companies participate in unsavory, predatory, and even illegal practices that take advantage of a consumer’s financial vulnerability.
What’s all this I hear about structured settlements and getting cash now?
Some lending companies also offer up-front loans for individuals who have settled or won something called a “structured settlement” as a result of a lawsuit. The NLR describes them as follows:
A structured settlement allows the defendant to pay the settlement or judgment award over time. It works like an annuity, allowing the plaintiff to receive the money in installments according to a negotiated schedule, and sometimes allowing the plaintiff to apply for payment as needed. The money will come either directly from the defendant in the case or as an annuity the defendant purchases from an insurance company. The terms of a structured settlement are negotiated as a part of the overall settlement or after a judgment is rendered.
These companies will offer consumers the option to sell their future structured settlement payments at a reduced rate. Although this is legal, a court must approve this transaction.
Why are lawsuit loans such a bad idea?
For many people, especially those in need of immediate money, this sounds like a great deal. Let us be clear: they’re not.
- There are no regulations on lawsuit loans, which means the interest rate can vary wildly between lenders.
- Pre-settlement loans are considered high-risk, so lenders typically charge interest by the month rather than the year. This means they earn much more interest on your loan – immediately and ongoing.
- These terms are often hidden in the “small print” or in confusing legal language, leading many vulnerable borrowers to sign off on interest rates and collection policies they may not completely understand.
Our opinion? Stay away from these completely. The disadvantages absolutely outweigh the advantages, and you can never be too careful when it comes to finances.
A quick note about compound interest
We’re not accountants, but we want to take a minute to talk about compound interest. It’s basically interest ON your interest, and some of these companies will compound your monthly interest. CueMath has a free interest calculator that we used to see how much compound monthly interest you might pay on a loan for $99,999 (it wouldn’t let us use a round $100,000). It breaks down like this:
Lawsuit loan: $99,999
Rate of interest: 15%
Time of loan: 2.5 years (30 months)
Total interest: $45,160.88
That’s a lot of money. And given that some of the contracts we’ve seen don’t say anything about being able to pay your pre-settlement funding back early, you may be stuck with this plan for a long time.
Don’t let legal funding companies take advantage of you
If a pre-settlement funding or lending offer sounds too good to be true, it is. The attorneys here at Philbrook Law recently assisted a client who had taken out a loan on their injury claim. Our client was in need of quick money and had a personal injury claim in progress. The lending company provided him with a $620 loan, with the understanding that if the client didn’t win his case, he didn’t have to pay back the loan. It’s important to note, however, that these companies only lend to plaintiffs who have a clearly successful case.
It turned out our client’s agreement with the company included over $300 in processing fees and a 58.68% interest rate of which they were completely unaware. The legalities around this are extremely murky and quite difficult for the everyday person to understand.
Not every company is trying to scam you, however. The Alliance for Responsible Consumer Legal Funding (ARC) is a trade association and coalition that “supports, and advocates for, legislation that enacts robust consumer protections for consumer legal funding, and maintains consumer access, because good legislation does both.” They further note that companies involved in their association must provide a “plain English and transparent contract that clearly shows the consumer’s rights and obligations.”
The takeaway here is that you should always consult with a knowledgeable attorney if considering taking out a pre-settlement or lawsuit loan. If you feel you’ve been a victim of a predatory lender, our attorneys can help with that, too.
At Philbrook Law Firm, our personal injury attorneys work with you throughout the entire legal process to ensure a successful resolution of your case. Our goal is to maximize the compensation to which you’re entitled for your injuries and losses, and that you secure your compensation in a timely and proper manner. If you have any questions about your potential injury claim and how the legal process works, we’re here to answer them.
To schedule an appointment with our Vancouver, WA and Battle Ground, WA personal injury lawyers, call our offices or fill out our contact form.
Founding Attorney Matthew Philbrook attended Clark College, Washington State University, and Gonzaga University School of Law. He is a member of the Washington State and Oregon State Bar Associations and started Philbrook Law Office in 2005. He specializes in Personal Injury, DUI and Criminal Defense cases. Learn more about Mr. Philbrook.