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Lawsuits & Litigation

The Pros and Cons of Pre-Settlement Loans

— March 3, 2021

Consumers should take extra precautions when considering companies for pre-settlement funding.

People who find themselves involved with filing a lawsuit may need money for several expenses, including legal fees, as they await a final decision on the matter. A pre-settlement loan may be just the thing for you if you find yourself in this position. 

Pre-Settlement Loans Explained

Lawsuits can take years to settle. It is also common for the accident instigating the civil action to cause the plaintiff financial problems through missed time at work and additional medical bills. 

Companies that provide pre-settlement loans alleviate financial pressure for the plaintiff by purchasing the rights to the lawsuit from a plaintiff. A company may buy some or all of the rights to a pending claim. The plaintiff will receive cash compensation for the purchase while the legal process is still ongoing. 

Pre-Settlement Loan Advantages

The main benefit to a pre-settlement loan is getting the money needed to cover living and legal expenses while waiting for the court process to play out. The money from a pre-settlement loan can prove useful for:

  • Making mortgage payments
  • Paying medical bills
  • Replacing damaged property
  • Making car loan payments

The plaintiff is likely to negotiate a better settlement for themselves once they enjoy the financial relief provided by a pre-settlement loan. Once you pay your bills and replace lost wages, it is much easier to show patience while evaluating settlement offers. Not feeling the pressure of a stack of unpaid bills gives you the option to reject all settlement offers if none are satisfactory.

Brightly colored paper clips with business papers, calculator, and pen; image by Alexander Stein, via, CC0.
Brightly colored paper clips with business papers, calculator, and pen; image by Alexander Stein, via, CC0.

Instead, a plaintiff can take the case to trial, without worrying about the additional time taken by courtroom proceedings. 

Pre-Settlement Loan Concerns

The pre-settlement loan will provide you with the cash you need to take care of your expenses. However, this fact does not make this loan the best option for all plaintiffs. 

You must repay the money you receive as part of a pre-settlement loan once the financial compensation from a successful lawsuit becomes available. The principal borrowed plus all interest and fees must become paid in full. In some cases, this amount is double the money received or more. An important point to remember is that you are never required to pay more money than the full settlement amount to a pre-settlement loan company. 

You may be able to save yourself quite a bit of money by not taking a pre-settlement loan. Other resources for you to consider include:

  • Money from insurance
  • Disability payments
  • Installment loan
  • Friends and family

A second downside to pre-settlement loans is that they can become a bit difficult to qualify for in some cases. Lending companies are taking a huge risk and will want to know there is a reasonable chance to recoup their investment. Plaintiffs may find it necessary to apply to a handful of companies before finding one that will take their case.

Government Protections

Both state and federal governments seek to protect consumers against predatory lending practices. These protections become relevant for consumers when they complete financial transactions like buying a house, applying for a credit card, or seeking an installment loan. 

Pre-settlement loans are unregulated by the federal government. A few states provide protections for consumers interested in loans against a settlement. However, these protections are not as extensive as they are with other financial transactions. 

Pre-settlement funding companies argue that the service they provide is not a loan. They claim that because of this, the regulations applied to loan companies are not relevant to them. States have agreed with companies for the most part and continue to allow the industry to operate without much oversight. Consumers should take extra precautions when considering companies for pre-settlement funding. 

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