Bank Loans vs. Pre-Settlement Funding: How To Choose

Lawsuits are expensive, and in many cases going to court can be prohibitively expensive. This sad fact is especially true for people seeking damages for a personal injury or situation that has left their finances in a sorry state. Some people say “nothing is more expensive than a cheap lawyer” since legal experience and the resources of a firm can be costly yet invaluable for the success of your suit.

A legal gavel and scales of justice

There are some options available for people looking to bankroll their lawsuit, even if they do not have liquid funds available for court costs and legal representation. Two of the most commonly used options are taking out a bank loan or arranging for pre-settlement funding. There are benefits to each method, so educating yourself before making a decision is the key to avoiding extra expenses or interest.

Using Bank Loans for a Lawsuit

Bank loans have a lot more transparency than newer products in the lending industry. If someone has other loans with a bank or credit union, they may also have established relationships that can help them receive lending even in a tough time.

Wads of dollar bills

Lawsuits and living expenses can quickly add up, though, and banks can only offer a certain amount of unsecured loan value. You will often need to add collateral to the loan, but another mortgage or pulling value out of a vehicle or other titled piece of property can swamp someone with interest or payment increases. Banks will not be able to use your anticipated lawsuit settlement as collateral as a lawsuit loan company can.

Pre-Settlement Funding

Also known as a lawsuit loan, pre-settlement funding is a cash advance against a potential settlement or case outcome that is expected to come with compensation. That is a textbook way to describe the process; you might be more familiar with ads on daytime TV promising quick and easy cash in hand for people waiting on a lawsuit. Pre-settlement funding is a massive business, and many people are fortunate enough to use it to get back on their feet.

Pre-settlement funding involves finding a lawsuit loan company to give them a cash advance. The cost of this money is typically in two forms, as borrowers will need to pay back the borrowed amount plus interest and also a “funding fee” a the time of settlement. Immediate cash can be a lifesaver for people who are being buried in bills, especially after a loss of income. This method is common for personal injury lawsuits or wrongful termination cases.

This type of loan usually has higher interest rates and hefty funding fees, but there is another huge benefit for plaintiffs that need quick cash. If you lose your settlement, in most cases, you do not have to repay the loan. The large risk of nonpayment is what makes pre-settlement funding a tricky game for the companies that offer it, and it is why the loan comes at a premium cost.

A calculator used for financial analysis

Unfortunately, in any industry where there are people with a great need, others will find a way to exploit it for their own benefit. Pre-settlement funding can be a great resource for many people, but you should always seek out a pre-settlement funding company with a long, positive track record and a good rating from the Better Business Bureau.

Pitfalls of Lawsuit Loans

In some states, lawsuit loan companies do not operate under the same regulation and oversight as traditional financial institutions like banks. This loophole opens up room for some pre-settlement funding operations to take advantage of their customers. There may be undisclosed, high-interest rates or other unfavourable terms hidden in the fine print of the loan agreement. Make sure to read everything and work with a reputable company.

Another thing people do not think of is the time before a settlement or judgement is reached. If it takes three years to settle your case, have you run out of money again? And while you do not have to make payments during the case, interest will be accruing, so the amount you pay back could be much, much higher than the amount you borrowed.

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