The Pros and Cons of Lawsuit Loans

The litigation loan industry lends plaintiffs more than $ 100 million each year in the US, but at what cost to the injured and their loved ones?

This type of financing is also known as litigation advance, litigation financing, settlement financing, and pre-financing. Regardless of what you call it, the ability to get an advance payment on a pending settlement has helped thousands of people get their costs back during the litigation. That doesn't mean it is risk-free.

Litigation loans are typically funded by hedge funds, private investors, or banks willing to lend plaintiffs money with the promise of a high return on their investment. Litigation lending critics have pointed out that the legal standards of other types of lenders inevitably do not apply to this type of lending because it is largely unregulated in most states.

The plaintiff lending business emerged over the past decade. This was part of a trend where banks, hedge funds, and private investors put money into other people's lawsuits. But the industry, which now lends plaintiffs more than $ 100 million a year, remains unregulated in most states. It can ignore laws protecting people who take out loans from most other types of lenders.

Why people take out litigation loans

According to a 2019 survey by Charles Schwab, 59% of Americans are one paycheck away from homelessness. That situation has certainly not improved since the country was hit by a pandemic last year. Many people already struggle to make ends meet, and an accident could quickly put the average person in financial distress.

If someone is injured in an accident caused by the negligence of another party, they may lose their ability to work temporarily or permanently. This can quickly drive a family that has barely made it past financial limits into an endless cycle of late notices, pick-up calls, and eviction notices.

Before discussing whether or not the benefits of a lawsuit are worth the disadvantages, we need to consider that this is not just a theoretical discussion of whether certain types of lending are predatory or not enough regulation. The pros and cons of litigation loans must be weighed against the actual financial consequences a particular plaintiff may face during their lawsuit before a judgment can be reached.

The benefits of litigation loans

There are numerous benefits to using upfront financing, especially if you are a plaintiff in financial distress. The biggest benefit, of course, is having groceries in your refrigerator, working utilities, and a roof over your head while you are unemployed and struggling to recover from an accident. However, the benefits go beyond basic survival needs.

Insurance companies often pressurize accidental injury victims to settle for an unfair amount because they know they are in a bad situation and are looking for an immediate solution. You can drag out the settlement process in the hope that the plaintiff will give in for financial reasons. Additionally, personal injury attorneys may feel pressured to cover their clients' costs during the claims process. This can be a huge expense.

One of the advantages of litigation loans that claimants value the most is in some types of funding, such as: B. Financing before billing. You will not have to repay the loans if your case cannot be resolved or if it does not receive judicial award. Of course, this is only beneficial if you are certain that the type of funding you are signing up for does not require repayment. It is important that each plaintiff clearly understand the terms of the funding before signing any agreements.

The disadvantages of litigation loans

The main disadvantage of litigation loans is cost. While a lawyer can potentially reach a much bigger settlement if the plaintiff can afford to stay there during the negotiations, many accident victims and their families are still shocked when the final score comes in.

This is only a disadvantage if you don't know exactly what the interest rate will be and what that number might look like in relation to your estimated billing. It can also become a disadvantage if you get a larger litigation loan than you need. However, if you only take what is needed and are realistic about what your statement will look like after the interest is paid, the settlement financing can keep you afloat during this troubled time.

Another disadvantage of litigation loans is the fact that you may not be qualified, especially if the lender does not require you to repay the loan if your case is unsuccessful. These lenders take great risk. To qualify for settlement financing, your case must likely come to a favorable outcome for the injured party.

What Borrowers and their Lawyers Need to Know

Litigation loans can mean the difference between exercising justice and further sacrifice by insurance companies that put profits before lives. You can also put a plaintiff in sticker shock and maddening them if they don't do their homework and understand what they're getting into before they sign on the dotted line.

When looking for a lender, be it for yourself or for a client, be sure to choose a litigation loan provider who believes in complete transparency throughout the process. If a lender is not working with you on a personal level to ensure that you clearly understand the terms of the loan, it is better to relocate your business.

Are the advantages of litigation loans worth the disadvantages? The answer is ... it depends on the plaintiff's situation. If you or your client can pass the lawsuit without accepting funding, this is probably your best option. However, when you're struggling and there is no end in sight, you may find that the downsides of settlement finance are well worth the benefits.

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