What is a settlement loan?

 

A settlement loan is similar to a cash advance. It is a way for a claimant to borrow money against an expected lawsuit settlement. The purpose of a settlement loan is to help the claimant pay their bills and other expenses while they wait for the resolution of their lawsuit. Settlement loans may also go by names like lawsuit loan or pre-settlement funding.

Even though it is called a loan, it is different from the types of loans you might get from a bank or credit union. Banks don’t offer settlement loans. To get one, you would need to contact a lender that specializes in lawsuit funding. Since the funds are backed by your expected settlement, you usually do not need to have a credit check to get a settlement loan.

Settlement loans are commonly available for personal injury lawsuits like those that involve car accidents, slip and fall injuries, product liability cases and medical malpractice. However, the lender is going to have requirements and they are going to want to evaluate your case before providing funds.

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How does it work?

The first step in securing a settlement loan is to have a lawsuit. From there, you would need to apply for the funding with a lender. The lender would look at your case, estimate the value of the claim and evaluate your chances of reaching a settlement or winning the lawsuit. Once they have completed an assessment of your claim, they will decide whether they want to extend a loan and the amount you can borrow against your settlement.

With most settlement loans, the borrower is not expected to make any payments until there is a settlement or a judgment in the case. Payment for many of these loans will be contingent upon you receiving a settlement. That means you don’t have to pay it back if you don’t win or receive a settlement. This is why these lenders will only offer funding for cases that have a very high probability of ending in a settlement.

As you might suspect, these lenders are businesses and they do not offer lawsuit advances just to help people out. The loan will come with interest and fees and you need to consider the cost before you accept funds.

While it is true that you could spend the money from a settlement loan on anything, you should try to limit the amount of money you take out. If you take too much, you might end up spending most of your settlement before you even get it. 

If you do accept pre-settlement funding, it will have to be paid out before you get the remainder. That means that your lawyers have to get their fees, you have to pay legal expenses and then you have to pay the loan and any associated fees or interest before you take any money home. 

Why People Take Settlement Loans

As we mentioned before, settling a lawsuit can be a time-consuming process. Even the most straightforward of cases can take months or even years. During that time, your regular expenses will continue and you are likely to have medical bills on top of that. If you can’t work as a result of your injuries, this can compound the problem even further.

All of this is to the advantage of the defendant. Insurance companies are known to drag cases out for as long as possible. Their hope is that the financial strain and stress of the lawsuit will cause you to settle for less. 

Pre-settlement funding can be a remedy that allows the claimant to maintain his or her finances as they wait for the case to resolve. When used wisely, the funding can buy you the time you need to negotiate a better settlement. 

Why Settlement Loans are Not Always a Good Idea

Settlement loans can be a vital source of income for people who are in the middle of an accident lawsuit. While they might be useful, they are not the right choice for everyone and it is important to consider the potential downsides. 

Getting some of your settlement money early may sound great, but you have to think about the interest and fees. Settlement loans are unregulated in most states and the costs can be high. Furthermore, since the lawsuit may take years to resolve, the interest could accumulate while you are waiting. If you are not careful, you might end up with very little left over when you finally get an award or settlement. 

You also have to consider the fact that not all cases are eligible for pre-settlement funding. Since you won’t have to pay if you don’t receive a settlement, these businesses only lend when the claim is close to a sure thing. You might have to apply to several lenders before you get approved. If your case is viewed as a little riskier, they might want to charge more interest.

It can also be difficult to find a reputable lender. Many of these lenders are decent businesses, but it is a largely unregulated marketplace. If you are not careful, you might make a deal with a predatory lender. This is why you need to compare different lenders and take the time to make sure you understand the fees and interest. 

A settlement loan can be a financial lifeline for those who are experiencing financial issues while awaiting a personal injury settlement. With that said, you have to be realistic about what you are getting into and you need to do your homework before accepting an advance. Better yet, you should do your best to avoid taking a settlement loan by taking steps to supplement your income and reduce expenses. 

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Alternatives to Taking a Settlement Loan

If you need the money, taking a settlement loan can be a good idea. However, you should try to cut expenses where you can and look for other ways to find income. If you can avoid taking a settlement loan, it will increase the amount of money you receive at the end of your lawsuit. Even if you do need to take a settlement loan, it is a good idea to limit the amount you need to borrow.

The following are a few of the things you could do avoid a settlement loan or reduce the amount you would need to take in an advance:

Personal Loans

If you have good credit, getting a personal loan from a bank or credit union could be a good way to avoid a settlement loan. It is still debt, but there is a good chance that a personal loan will serve you better than pre-settlement funding. 

To start, a loan from a bank or credit union is likely to cost much less when you total up the fees and interest. As long as you can service the loan payments, it could save you a considerable amount of money when you finally get a settlement. You might also be able to structure the loan so you have several years to pay it off. This will decrease the monthly payments and make it easier to manage while you wait for the resolution of your claim.

Friends and Family

With a strong support network of friends and family members, you might be able to make it through the process without having to take a lawsuit loan. It might be uncomfortable to ask, but most friends and family members will be willing to help if they are familiar with your situation. Even if they can’t provide for all of your needs or eliminate your financial burdens entirely, any amount of help you receive could make a big difference if it limits the amount of money you have to take out in a settlement loan. 

Health Insurance

You need to get the most from your health insurance if you are waiting for an accident settlement. Take the time to understand your policy and make sure your health insurance provider is paying for everything they should be paying for. 

You should also be careful about what you accept from your car insurance company if you have a claim against them. They might offer to pay for some of your expenses now, but that could affect your broader claim for a personal injury settlement. Try to get your health insurance company to cover as much as possible and talk to your attorney if your car insurance company offers to cover any of your expenses. 

Credit Cards

You might be able to apply for a low-interest credit card to cover some of your expenses. It is not ideal to accrue debt, but with the right card, it could cost less than taking a settlement loan. Some credit cards even come with 0% interest and no payments for a year. You will need to make sure you can cover the payments when the promotional period ends, but it could be a way to reduce the amount you would need to take in pre-settlement funding. 

Disability 

If you are injured and can’t work, you might be able to apply for disability or social security benefits. It might not replace all of your income, but it is another way to ensure that you have money coming in while you are recovering from your injuries. 

Charities

Being injured after a car accident can be a serious financial strain. For some people, it might even be difficult to cover the cost of basic necessities. If that is the case, you should look into local charities that might be able to help with things like food. 

If you have trouble finding local charities, you should talk to your lawyer about assistance. Your attorney might not be able to offer a loan, but they should be familiar with local charities and government programs that could help with your financial situation. 

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Talk to Your Attorney for More Advice

Dealing with a personal injury lawsuit isn’t easy. You not only have the injuries to consider, but you also have to pay your rent or mortgage, utility bills, car payment, put food on the table and more. With a lawsuit that can take years, this can result in serious financial hardship for personal injury claimants. 

A settlement loan can be one way to manage these financial issues, but it will come with costs. You don’t want to accept an advance on your settlement if it is going to cost you too much in interest and fees, but you do need to maintain your financial obligations. It is better to look to other options if you can avoid taking pre-settlement funding. 

If you are experiencing financial trouble in the middle of a lawsuit, you should consult with your personal injury lawyer. You won’t be the first client to have these , and they should be able to provide practical advice.