It is not a secret that facing a legal matter while injured can be financially challenging. When you add inflation to the equation, these people land in a much worse position as they cannot get enough money to survive. Furthermore, historically, people involved in legal claims rather suffer from insufficient income due to injuries, amongst other factors, and many will turn to get loans to cover the most essential expenses such as food and shelter.
Whether it is wrongful imprisonment, discrimination, or an auto accident, most of these innocent victims dare to get financing from their expected proceeds from the case as they hope to get compensated in the end. This type of financing, which helps people tremendously, is called pre-settlement financing. However, it is essential to choose a reputable company before getting one.
What is pre-settlement financing?
Before settling your case or winning a judgment, you should be prepared for the day-to-day and other expenses involved when injured and out of work during a legal proceeding.
As mentioned, pre-settlement funding is an option to get some money during the legal process as it gives you capital in advance for a pending settlement award or awaiting court judgment. These advances don’t carry much risk to the borrower since they don’t have to be paid back unless you succeed at the conclusion of the case and get paid compensation for it.
While the loan or financing is outstanding, interest will be charged at varying rates depending on the provider. Various reputable funding providers offer settlement advances for all sorts of claims, such as Baker Street Funding, which can give these funds ranging from a few thousand dollars up to 2 million for lawsuit funding.
Do you need pre-settlement funding?
Legal cases can take months or years before they can reach an acceptable settlement. Therefore, the plaintiff may be in need of financing to cover living expenses on top of medical bills, lack of income in addition to inflation.
You may find the need to take this type of loan, especially when you can’t make a living due to the trauma or injury which caused you to file a case in court in the first place. For example, if your work requires a 50/50 vision, then you become a victim of medical malpractice that affects your eyesight; cash from a settlement loan can temporarily help you recover from the loss of income.
What should I be aware of when getting into this kind of financing?
Because lawsuit loans are a relatively new financing option, there may be little or no rules in most jurisdictions. Even if it is similar to debt financing, it could be more costly and may not have the same consumer protection expected with individual borrowing. As a result, it can carry significant interest rates if a lender is predatory, and that may even take a huge portion of the settlement.
If not planned properly, the interest may consume the whole settlement or require you to pay an additional amount. Furthermore, if you have a personal injury case, do not finance your case with a litigation finance firm. Companies like Validity Finance only focus on commercial claims and not personal injury disputes.
It is important to carefully review the company where you would like to take a lawsuit loan and ensure they end the loan within a set amount of time from the day you take one out. This will protect you if your case takes longer than expected to conclude.
How is a bank loan different than a settlement advance?
Any loan is a risk to you and the financial company. Whether they offer pre-settlement loans or not, it is important to consider your options wisely. And it is also important to understand that a settlement lender is taking most of the risk by offering the money you won’t pay back if you lose your case.
Banks such as Wells Fargo love to give loans to low-risk borrowers, and they’ll ask for things like a car or a house as collateral to secure their loans in exchange for low APR as little as 5.99% per year. But they highly require a credit check and income verification before even considering you for a loan pre-qualification.
Banks and financial institutions do not view your future settlement money as collateral, meaning there is no chance they’ll invest in your case because the risk is too high for them, especially if your credit is bad and you are out of work. With a bank loan, the borrower with the highest credit score, little debt, and stable income will get the lowest rates.
If you are looking for a loan with a decent APR surrounding 3% and 18% per year, with a good credit score, acceptable debt-to-income ratio, and stable income, you are better off getting a bank loan instead of settlement financing.
However, if you have already exhausted these financial options, then pre-settlement funding may be what you need. Pre-settlement funding companies do not check any of the criteria that banks require. A settlement funder’s only focus is that your case is strong and valuable to ensure they will get paid once compensation is received. Otherwise, the funder takes on the loss, and you can default on their loan.
With that said, there is no such thing as getting charged an interest rate like a bank with a pre-settlement advance because these lenders don’t require the criteria that banks do to secure their loans, and their structures are completely different than traditional loans.
A settlement financing company will require your attorney to submit plenty of documents and would take on a case that has a high probability of winning before approving it for funding. They don’t rely on credit scores, income, or assets, which leads to a much higher interest rate than a traditional bank loan due to the high probability of default if the case is lost. They also provide much higher amounts than bank loans since they base the money advanced to you on a portion of your case. So if your case is worth $100,000, you can get up to $10,000 with a pre-settlement loan with an added interest rate between 27% and 42% per year.
Finally, you may not be required to pay back the loan on a settlement if you lose on the case, but if you get funding from a lender who provides predatory rates higher than the mentioned above, you may end up in a terrible position.
Conclusion
If you find yourself in need of funds during a discrimination, police brutality, false arrest, or another personal injury case, you may want to think about getting a settlement advance to help relieve financial stress while you wait for the lawsuit to be settled.
However, consider exercising extreme caution with these loans because presettlement funding provides limited consumer protections. The key is to fully understand the terms and conditions of the risk-free loan while weighing the pros and the cons – for it to be considered a wise financial decision.
