Is a Lawsuit Loan Really a Loan?

LoanIf you’re facing a protracted and expensive legal battle, chances are you’re already receiving all sorts of junk mail offers. These colorful documents loudly proclaim how you can receive money in advance of a settlement, and see it in your bank account in as soon as twenty-four hours. This may be an entirely new experience for you, and perhaps you’re trying to understand if these offers are worth pursuing. What you are being sold is known as a lawsuit loan. It is a fast cash opportunity to bring in some capital to help you manage your legal expenses, often making the difference between success or failure. And you’re not alone in considering this opportunity. The lawsuit loan game has become a $100 million business on a year-to-year basis. It hasn’t been around that long, but it is gaining in popularity. But is a lawsuit loan really a loan?

Here’s how the process would work. You’ll either call in to the lawsuit loan service, or fill out an application found on their website. The firms that deal in these services make themselves quite easy to find, so you won’t be short of suitors. Once you apply, you or your lawyer will be contacted by the funding company. They’ll want to hear out the details of your case, and if they determine that you’re going to win, you’ll get the money you ask for. In general it will be several thousand dollars, but some plaintiffs in major cases can actually receive a mid-five figure loan. It’s always going to depend on your chances of legal success.

Depending on your situation, this money could come just in the nick of time. Many people who apply for a lawsuit loan don’t actually use it to pay their legal fees. After all, these are plaintiffs, and in most cases the lawyers won’t take a fee until they win a settlement. But the weeks and months spent in court, in addition to the hardships that led to the lawsuit in the first place, often leave people financially strapped. The lawsuit loan will be used to pay personal expenses, often the mortgage, car payment or even a grocery bill. It’s that little difference that allows them to keep moving forward on the case.

Yet it isn’t exactly a loan. First of all, there are some extraordinary interest rates to contend with. The lending bodies will often gloss over their interest rates, trying to make them sound lower than they are. And at first glance they don’t seem to be that big a deal. After all, a 4% interest rate is better than most traditional loans, right? Except that interest is compounded every single month. That means when you look at it annually, the compounded APR could be as high as 60%. The lending bodies don’t care what your credit is, nor do they ask for collateral. So this is the only way they can manage their risk.

In addition, the lender will not get their loan back if you lose your court case. They are used to getting less than what they estimate in return for the ‘loan’ in close to the majority of cases. This is how they legitimize those insane interest rates. Because they have no recourse to receive payment if you don’t win your case, a lawsuit loan doesn’t have to follow traditional banking or lending regulations or laws. You’ll notice they rarely refer to themselves as lenders, but as ‘litigation funding companies’. You’ll have plenty of companies rushing forward to offer you quick lawsuit loans, but you should certainly think long and hard before you take advantage.