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The Pros and Cons of Lawsuit Loans

— October 8, 2021

The lack of government regulation and oversight of the lawsuit loan industry means that you need to be extra careful and take time to compare lawsuit loans from different companies.

It takes time from when a plaintiff files a lawsuit until there is an award of damages either through a negotiated settlement or a judgment after trial. This delay frequently creates financial hardship particularly in personal injury cases, such as motorcycle crashes or other serious accidents. The injuries may be so severe that plaintiffs miss time from work while undergoing medical treatment and rehabilitation.

Adding to the pressure of trying to come up with money to put food on the table, pay rent, or not default on your mortgage are the bills from doctors and hospitals for the treatment of your injuries. Plaintiffs all too frequently cave into the financial pressures by forcing their lawyers to settle for far less than the true value of their claim.

There is, however, an option for getting enough money to cover living expenses and other bills without compromising your lawsuit. Lawsuit loans enable you to receive an immediate cash advance based on the value of the anticipated settlement or judgment of your pending case.

Lawsuit loans can be the solution to financial challenges faced by plaintiffs awaiting settlement of lawsuits for damages. Before deciding to apply for a cash advance, it is essential for you to understand how lawsuit loans work and the pros and cons associated with them.

What is a lawsuit loan?

Companies offering lawsuit loans agree to give you a cash advance based on their evaluation of the likelihood of a pending lawsuit ending with a settlement or judgment in favor of the plaintiff. The cash advance represents a portion of what the company funding it estimates a plaintiff will receive from the lawsuit.

The business of providing a cash advance against the settlement or judgment in a lawsuit goes by several names in addition to lawsuit loans, including: 

  • Lawsuit funding.
  • Lawsuit cash advance.
  • Settlement funding.
  • Pre-settlement funding.
  • Litigation funding.

No matter the name given to it, the company advancing money to you agrees to be repaid from the settlement or judgment that you eventually obtain in the case. Companies offering lawsuit loans charge interest and fees to compensate them for their services.

How does a company decide whether you qualify for a lawsuit loan?

Use of the term “loan” in connection with lawsuit funding can be misleading. It’s not really a loan in the sense of a lender giving it to you on the strength of your credit history and expecting periodic payments from you until it is repaid.

Companies offering lawsuit funding do so based solely on the strength of your case. Your credit history, credit score, and other debts that you may be obligated to pay do not factor into the decision-making process. If that sounds too good to be true, keep in mind that you have no personal obligation to repay a lawsuit loan because the terms of the agreement with the company provide for repayment of the advance with interest and fees from the settlement or judgment in your lawsuit.

When it approves a cash advance, the lawsuit funding company agrees to accept any loss caused by an unfavorable outcome in the lawsuit or an award of damages that does not cover the full amount owed to it. It agrees to take the risk in exchange for the high rate of interest it makes should the outcome of the case be as it had anticipated.

Advantages of lawsuit funding

People performing first aid on an injured man; image by Daniela Santos, via
Image by Daniela Santos, via

Although any type of lawsuit in which a successful plaintiff receives monetary damages may qualify for lawsuit funding, plaintiffs in personal injury cases may have the greatest need for it because of being unable to work due to their injuries. Benefits of lawsuit loans include the following:

  • Immediate access to cash to pay bills: No matter how strong your claim for damages may be, the time it takes to reach a settlement or take the case to trial may be too long to wait when you cannot work and fall behind paying bills. Lawsuit funding gives you quick access to cash to pay household expenses while waiting for the case to be settled.
  • Gives your lawyer time to work toward a fair settlement: A common tactic used by insurance companies is to take advantage of financial pressures to force a plaintiff to accept a settlement for less than a case is worth. Settlement funding relieves financial pressures to give you and your lawyer time to either continue negotiations with the insurance company or take the case to trial.
  • Non-recourse feature of lawsuit funding: Using a company offering lawsuit funding that does not make you personally responsible for repayment of the cash advance eliminates any risk to you in the event of an unfavorable outcome of the lawsuit. It is essential that you have your attorney review the terms of the lawsuit loan to ensure that its terms include non-recourse language freeing you from personal responsibility.

As good as the benefits of lawsuit funding may seem, do not rush into making a decision before considering the disadvantages.

Disadvantages of lawsuit loans

Cost may be the greatest disadvantage of lawsuit funding unless you carefully weigh it against the advantages it offers to you. The company funding the cash advance charges interest on the money at rates far in excess of what you may pay on a typical bank loan, but your bank expects you to pay it back while the company offering a lawsuit loan looks only to the settlement or judgment as the source of repayment.

Another disadvantage to lawsuit funding has to do with the fact that companies are very careful in their evaluation process, so they do not accept all lawsuits. Only cases with a high likelihood of a settlement or judgment in favor of the plaintiff will be approved for lawsuit funding.

Avoid making hasty decisions about lawsuit loans

The lack of government regulation and oversight of the lawsuit loan industry means that you need to be extra careful and take time to compare lawsuit loans from different companies before deciding to submit an application. Also, be certain to involve your lawyer in the decision-making process to ensure that you understand the terms and cost of the lawsuit funding.

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