A Guide to Plaintiff’s Settlement Loans
Clients, especially those dealing with personal injuries may run out of funds when their case is months or years from being settled. Settlement loans have in the recent past been viewed as a viable option for helping alleviate the client’s financial standings so that they may get the financial breather they needed to go on with life.
However, this funding type is relatively new and it comes with perceived exorbitant interest rates, and as a professional attorney who cares for the welfare of their clients, it is imperative to know exactly how to guide the client whenever they are considering legal funding before their settlement is reached.
A client should also not be ready to rush for these funds, but take their time and evaluate all the pros and cons and make sober determinations on whether or not the funding is necessary.
What the client should know before going for these loans
Lawsuit funding should always be viewed as the last resort – the only option you have when every source of funds has been exhausted. The main reason they should never be the number source go-to source of funding is that the interest rates may be reasonable, but they are never cheap and if careful considerations are not made, the client may end up with nothing once the settlement is made.
With most legal funding lenders, the interest is based on monthly rates, which are further compounded on a monthly basis, thus making them very expensive.
In as much as lawsuit funding may have subtle benefits that may not be available with traditional lending, they are far much more expensive than their traditional counterparts.
Factors to consider
There is a lot of ignorance amongst clients when it comes to cases which truly qualify for lawsuit funding. It is imperative for every client to be well equipped with the right information when approaching the lending companies so that both the client and the lender won’t have to dig deep into the case or miss getting the funds altogether.
Here some of the factors the client ought to be well conversant with when approaching the lending company-:
- Information about the previous lending – most of the lawsuit funding companies will not accept applications for cases which have already been funded by other companies in the past. If you need funding for a case that has been previously funded by another, then the second company will have to “buy off” the interest of the first company and they will set their own new rates, which may be higher or lower than those of the first funder.
- Know about soft tissues injuries – it is difficult to get funding for cases with soft tissue injuries. Reveal to the funding company the most significant diagnosed injuries and mention the soft tissue injuries just in passing to see how they react to it.
- Know if your state permits lawsuit funding – not all states allow lawsuit funding, and before approaching a potential lending company, be sure that the practice is allowed in your state.
- The stage of litigation – Some companies will fund only cases that have been filed. If you have not yet filed your case, be sure to inquire from the lending company if they are okay with it, or if you will first contact your attorney to file the case before you can get the funds.
How to know if you are getting a fair interest rate
The number one reason why clients are encouraged to use settlement loans as a last resort is that the interest rates can sometimes go through the rooftops that the client may remain empty-handed once the settlement is finally made. But when it is absolutely necessary that one has to go for this type of lending, it is imperative to be vigilant and check that you are not going to pay unnecessarily high-interest rates.
To do this, you need to look into the funding contract, check specific interest-related clauses and ask any question you may have before you make the commitment. Here is a brief look at some of the things you should be looking for to help you get a good understanding of the interest rates which will be applicable to your:
Simple or compound interest
Are you being charged a simple or compound interest on the loan? This is a crucial part of the contract and one which you should deal with before every other thing in the document. Contingent upon when the case settles, when a 2% monthly rate is compounded, you may ultimately pay 3% for the interest. It is important to know that compound rates will exponentially increase the principal amount over time, and if your settlement takes a long time, you could end up paying a little fortune in return.
A word about the application fees
Application fees may be hidden in the contract as “administration fees” or “processing fee” and it is important to look out for them as well. The fees are never paid upfront, but they will be paid in conclusion once the case is settled. As such, you will also be paying interest on the application fee, though this is never the norm with most financial lending setups. For example, if you are getting $5000 in advance, with an application fee of $400, the compounded interest rates will be applied to $5400 and not $5000.
Brokers are everywhere in the financial sector, and not even the relatively new legal funding industry has been spared. If you get to deal directly with the lender who will be writing the cheque, then you don’t have to worry about broker fee. However, if you did pass through a broker, the broker fees may be applicable, and you must keep a keen eye on them.
To begin with, the broker will never reveal to you that they are a broker and for most of the transactions, you will be convinced that you are dealing with the real company. The broker fees may be up to 25% of the amount advanced, and this is an amount you wouldn’t wish to pay for when you are just recovering from your injuries and still facing financial constraints.
The broker fees will be treated in the same manner as the application fees – will attract interest and will be paid when the case is settled. To be safe, be sure to bypass brokers and work directly with the companies.