If a careless motorist, a fall on a slippery floor, or the negligence of a doctor causes you to be harmed, the law gives you the right to sue to recover compensation for your injuries.
While you wait for a settlement or a judgment after trial, mounting medical bills, coupled with a loss of income from being unable to work, may create a financial hardship that cannot wait months or years. One solution may be a lawsuit loan.
Lawsuit loans offer a way to obtain money right now by taking an advance against the settlement or jury award that you anticipate receiving in the future.
Before borrowing against the anticipated outcome of your personal injury claim, take a few minutes to learn about the concept of lawsuit funding and the pros and cons that go along with it.
What is a lawsuit loan?
The concept of allowing a plaintiff, which is the term applied to the party filing a lawsuit, to borrow money from a third-party lender against the value of the future favorable outcome of a personal injury case goes by many names, including:
- Lawsuit funding.
- Litigation funding.
- Lawsuit loan.
- Settlement funding.
- Lawsuit advance.
Regardless of what you call it, a company evaluates the value of a lawsuit and the likelihood of it resulting in a settlement or judgment in favor of the plaintiff.
The company or lender agrees to give the plaintiff a payment in exchange for an agreement to repay the lender the amount advanced plus a funding fee from the settlement or judgment.
It really does not fit the classic definition of a loan arrangement because the “borrower,” which in the lawsuit funding situation is the plaintiff, does not agree to make payments on the amount the lender advances or to be personally liable for its repayment.
Instead, the plaintiff assigns a portion of the settlement or judgment to repay the company the amount advanced plus its fee for funding the advance.
Keep in mind that the fees charged may differ from company to company, so it is a good idea to compare lawsuit loans to get the best rate.
Factors companies use to qualify a plaintiff for an advance
Unlike banks lending money to a borrower, the ability of the plaintiff to repay a lawsuit loan is not a factor because the funding company does not look to the person for repayment.
Underwriting decisions for lawsuit funding focus on the strength of the lawsuit, including its estimated value.
Factors that are taken into consideration in deciding whether to approve a lawsuit loan include the following:
- Status of the lawsuit: Generally, companies look for a lawsuit that has been filed by a lawyer representing the plaintiff and is actively progressing through the court.
- Type of claim made by the plaintiff: Underwriters look for a case that will generate a monetary award for the plaintiff either through settlement or at the conclusion of a trial, such as vehicle accidents, medical malpractice, slip-and-fall accidents, and other types of personal injury cases.
- Projected value of the case: The value of the case, meaning the amount of money available to the plaintiff after deducting attorneys’ fees and litigation costs, must be enough to ensure the ability of the company funding the lawsuit loan to recover the advance and the interest or funding fee it charges.
- Likelihood of a favorable resolution: The strength of the plaintiff’s case plays a key role in determining whether a company agrees to advance funds. After all, without a settlement or jury verdict awarding compensation to the plaintiff, the lawsuit funding company cannot recover what is owed.
- Attorney for the plaintiff: A plaintiff’s lawyer with only limited personal injury experience or one who is unwilling to cooperate with a lender may cause a company to be reluctant to approve the advance.
These are only some of the factors a company may use to approve a request for an advance, so ask the company you decide to go with about their approval process.
Pros and cons of lawsuit funding
The primary advantage of a lawsuit loan is the availability of immediate cash to pay bills and take care of other financial obligations.
Putting you in a better financial position also removes the pressure that insurance companies rely upon to force plaintiffs to settle their claims for less than their true value.
The benefits of lawsuit funding must be weighed against its main disadvantage, which is the cost of the advance.
The company offering to advance money to you is taking a risk and wants to earn a profit for it, so the fees or interest charges can significantly add to the amount owed by the time the case is settled or ends in a jury award in your favor.
Should you get a lawsuit loan?
Any decision about a lawsuit loan should center on what is best for you given your current situation. Discuss it with your personal injury lawyer and evaluate the cost and other terms of the advance before deciding.
Jared Stern is an experienced financial professional with six years of experience in the pre-settlement funding industry.
After graduating from UC Berkeley with a degree in economics in 2014, Jared began his career in Morgan Stanley’s mergers and acquisitions investment banking division.
After working with another pre-settlement funding company for two years, Jared founded Uplift Legal Funding in 2017 to give injured plaintiffs a better choice in lawsuit loans.