Pre-settlement loans are loans or cash advances to personal injury plaintiffs with principal and interest to be repaid out of the future settlements or verdicts in the case. The creditor generally takes a lien on the settlement or verdict proceeds, essentially using it as collateral, and often charges a high (sometimes even predatory) rate of interest.
When it comes to pre-settlement loans, there are five key things you should know:
- who is eligible to receive them;
- how they work;
- what you can spend the loan money on;
- how much they cost; and,
- what happens if you lose your case.
Pre-settlement loans are often referred to as
- lawsuit loans,
- lawsuit cash advances,
- pre-settlement funding,
- lawsuit funding, and
- litigation funding.
These loans are available in several different types of lawsuits, including personal injury lawsuits involving
1. Who is eligible to receive a pre-settlement lawsuit loan?
You receive lawsuit funding after you file a lawsuit and expect to settle your case or win the case in court.
While every pre-settlement funding company is different, generally all plaintiffs/claimants are eligible to receive a loan provided that they have a valid personal injury case.
Note that if you apply for a loan, many legal funding companies do not require such things as:
- credit checks,
- credit score demands, or
- employment verification.
If you qualify for a loan, you will likely receive a lawsuit cash advance within a few days.
2. How does pre-settlement funding work?
You can typically apply for a loan after you file a personal injury lawsuit. The lawsuit funding company that you apply with will then evaluate your case and decide:
- how much it may settle for, or
- how much you might win in court.
If the company approves your loan, it will pay you a pre-settlement cash advance. In return, you agree to:
- re-pay the lender the advance that you receive (often referred to as the “principal”), and
- a funding fee from your expected settlement money or jury/court award.
You usually do not have to make any types of payments (for example, monthly payments) until:
- your case settles, or
- you win in court.
The creditor will generally take a lien on your settlement, meaning you are putting it up as collateral. When your attorney receives the settlement money, he or she is obligated to settle all liens before disbursing your portion of the proceeds.
Many lawsuit loan companies will advance to plaintiffs 10% to 15% of their expected settlement amounts. So, for example, if your case is expected to settle for $100,000, you would receive a loan in the amount of $10,000 to $15,000.
3. What can you spend your loan money on?
Note that once you receive a loan, there are usually no major restrictions on how you may spend the money. Many claimants use the money to pay for:
- living expenses,
- medical bills/medical expenses,
- car repairs (especially in car accident cases), and
- credit card debt.
4. How much do the loans cost?
Once your pending lawsuit settles or you win in court, you will have to pay the loan company:
- the amount of the principal that it advanced to you, and
- a funding fee.
As to the latter, your funding fee is usually an interest rate on your loan that will vary from loan company to loan company. With that said, though, many people can expect to pay a 40% annual interest rate on a loan.1
Example: Lisa is hurt in a slip and fall accident and files a lawsuit against the owner of the property upon which she fell. She incurs some very expensive medical bills and needs help in paying them off.
Lisa enters into a pre-settlement loan arrangement with ABC insurance company. Per the arrangement, ABC decides to pay Lisa $15,000 upfront and then charges her interest on the loan at an annual rate of 40%.
Lisa settles her case for $100,000 after exactly one year. She now has to pay the insurance company $15,000 (which is the amount she was initially loaned) and an additional $6,000 (which is 40% of $15,000).
Lisa has to pay ABC a total of $21,000.
Note that some loan companies may try and charge an unreasonable interest rate on your loan. If you believe that the rate is too high, you should speak with your lawyer or a law firm for help.
5. What happens if you lose your case?
If you file your lawsuit and then fail to settle the case and/or lose in court, you generally do not have to repay your loan.
In this sense, the loan is considered risk-free since the funding company assumes the risk of a loss.
Please note that this assumption of risk is one of the reasons that the interest rates on these types of loans are much higher than on more traditional loans.
6. Is it a good idea to take a pre settlement loan?
We generally discourage our clients from taking pre settlement loans. Lenders tent to charge high rates of interest, often predatory rates with compounding interest. This can quickly eat up the value of the settlement.
While it’s nice to get money in your pocket now, you’ll be sorry later on if the case settles and all of your money goes to repay the loan. It’s like racking up credit card debt. It’s fun to spend the money, but not so fun when the bill comes due.
The only time pre settlement funding makes sense is if you have an urgent need for the money (such as to pay medical expenses), the interest rate and funding fee is reasonable, and you expect a substantial settlement to arrive soon.
- See, for example, Baker Street Funding website, “On Average, What Is The Interest Rate On A Settlement Loan?,” (2022). Note that some loan companies will charge a monthly interest rate as opposed to a yearly rate.