What is a settlement loan?

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In a Nutshell

Settlement loans give you a cash advance against an expected legal settlement. While you can get the cash you need to pay for necessary expenses right away, there are significant drawbacks to keep in mind.
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Whether you were in a car accident or slipped and fell at a store, personal injury lawsuits can be time-consuming, exhausting and expensive.

When bills start piling up, you might think about getting a loan to help cover necessary expenses. But there’s a price to pay for the convenience of getting some money before your lawsuit settles.

Here’s a look at how settlement loans work and some things to know before you apply for one.

What is a settlement loan?

If you’re in the middle of a lawsuit and need money to cover living expenses, a settlement loan (sometimes called a lawsuit loan, pre-settlement funding or litigation financing) may sound tempting.

Despite the name, settlement loans aren’t like traditional loans. They’re really a type of advance. While your case is pending, a lawsuit funding company gives you a cash advance on the expected settlement.

The types of cases commonly eligible for a lawsuit loan include …

  • Personal injury (someone’s actions cause your injury)
  • Auto accidents
  • Injuries in the workplace
  • Slip and fall (premises liability)
  • Medical malpractice
  • Product liability (a malfunctioning product causes your injury)
  • Wrongful death (someone’s actions or negligence causes the death of a loved one)

How do settlement loans work?

To take out a settlement loan, you apply for a loan after filing an eligible lawsuit. The lawsuit loan company evaluates your case’s merit, weighs your chances of winning the suit or the case being settled, and estimates how much you can expect to receive. Based on that information, it may offer you an advance.

But companies that offer settlement loans don’t do so out of the goodness of their hearts — they’re in the business of making money. When they offer lawsuit advances, they profit by charging you interest and fees that you’ll be expected to pay out of any settlement you receive.

Typically, you don’t have to make payments until your case is settled or you receive a judgment. Certain expenses typically need to be covered first, such as attorney fees and the expenses of litigation — then the loan company is repaid from the remainder.

What can settlement loans be used for?

If you were injured in an accident or as a result of medical malpractice, there’s a chance that you’re unable to work. As a result, you could fall behind on your bills.

A settlement advance gives you the cash you need to cover your living expenses and bills before a judgment is issued or the case is settled. You can use the money to pay for your rent or mortgage, car payments, medical bills or even groceries. The advance is yours to use as you wish.

What happens if I lose the case?

Depending on your agreement, you may not have to repay the advance if you lose your case. The lender typically can’t recoup the pre-funded amount unless you win your case, so risk of loss is part of its business.

And if your settlement turns out to be for less than the amount (principal, interest and fees) you agreed to repay, the lender may not be able to demand the difference. It may only be able to claim whatever settlement proceeds are left over after other prioritized costs have been paid, such as attorney fees and court costs. But the downside of that situation is that you could be left with nothing at the end of your court case. And remember, you can still end up paying a lot in interest and fees while you await a decision.

Benefits of settlement loans

Settlement loans have some distinct benefits.

  • You’ll get money for living expenses. With a lawsuit advance, you’ll get cash to cover your necessary expenses, which can help you keep up with your bills.
  • You typically don’t need good credit to get one. Settlement loan companies may not consider your credit when weighing your application and may not run a credit check. Instead they focus on the likelihood that your case will not only succeed, but also result in a settlement large enough to give them a return on their investment.
  • You can generally get the loan quickly. Some settlement lenders may be able to approve and fund your advance within hours or days.
  • You’ll have more time to negotiate. When you’re pressed for cash, you may feel as if you have to take the first offer the defendant offers you. A settlement loan can give you breathing room in your budget, so you have more time to negotiate a better offer.

Drawbacks to settlement loans

Short-term financing can have significant drawbacks, and settlement loans are no exception. Most notably, they can come with very high costs.

  • Settlement loans typically have high interest rates. Interest rates commonly range from 20% to 60% a year. A study by University of Texas School of Law researchers found the average interest rate for settlement loans is 44%.
  • Lawsuits can take years to settle. You may get stuck paying interest charges and fees for a long time before you receive a judgment.
  • Lawsuit loans are not heavily regulated. Many types of loan products are heavily regulated, but settlement loans are primarily regulated at the state level, meaning each state has its own rules regarding settlement loans. If you have issues with your settlement loan, you should contact the attorney general in your state.

Alternatives to settlement loans

Settlement loans can be prohibitively expensive — and risky. If you need cash, there may be other ways to get the money without resorting to a lawsuit advance.

  1. Consider a personal loan. If you have good credit, taking out a traditional personal loan can be a smart option. Good credit can help you qualify for a much lower interest rate than you would with a settlement loan, and you’ll have a fixed repayment period, too. You can in some cases spread out your payments for five or more years, giving you plenty of time to repay your debt.
  2. Apply for a low-interest credit card. Another option is to apply for a low-interest card. You can charge your necessary expenses at a much lower rate than a settlement loan would typically offer. If you apply for a card with an intro 0% APR, just make sure you pay off your charges by the end of the intro period.
  3. Ask friends and family for help. If you don’t qualify for a personal loan or credit card, ask friends or family for help. It may be embarrassing to ask, but it could save you a lot of money in the long run.

What’s next?

When you’re waiting for a settlement from a lawsuit and need money to cover essential expenses, settlement loans can provide you with funding. But they can come at a high cost. Interest rates are typically high, and if your lawsuit drags on you could face years of interest. If repaying your lawsuit advance takes a big bite out of your settlement, your lawsuit might ultimately do little to improve your financial situation.

Before committing to any type of high-interest, short-term financing, it may be better to pursue other sources of funding first. Skipping the settlement loan could help you save money over time.

About the author: Kat Tretina is a personal finance writer with a master’s degree in communication studies from West Chester University of Pennsylvania. Obsessed with her many side hustles, she focuses on helping people pay down their … Read more.