Lawsuit Loans - What are They?

Lawsuit loan is a term that refers to the practice of an individual or company advancing money to plaintiffs in personal injury, liability or some other form of civil action seeking financial compensation. Lawsuit loans provide money to pay bills and maintain your household while awaiting your court settlement.

Not really a loan in the classic sense, a lawsuit loan is an advance of funds to the plaintiff which is to be repaid upon a financial award when the case is settled. Lawsuit loans can be used for personal purposes or for legal fees if your attorney is asking for a pre-settlement payment.

Perhaps the most unique feature of a lawsuit loan is the fact that it must be repaid only if the lawsuit settles in the plaintiff’s favor. If the sum awarded the plaintiff covers the loan, then the lender has first call on use of the settlement. If the cash award provided by the court isn’t enough to cover the loan, no further payment is required from the plaintiff. And if the case is decided against the plaintiff, resulting in no cash award whatsoever, there is no obligation to repay the lawsuit loan.

Because of the risk involved in loan repayment, lawsuit loans are really more like a venture capital investment. The lender is betting that the plaintiff will win an award substantial enough that the loan will be repaid. These loans are expensive, and most lenders are candid about that fact.

Before accepting any proposed loan, a lawsuit lender will review the legal case in detail, in order to determine whether the case is winnable and if so, how much the settlement is likely to be worth. Reviews of this type for personal injury and liability cases (such as a slip on a supermarket floor) are based on hundreds of settlements for similar cases that have preceded the case under review.

The repayment schedules for this type of legal funding are usually based on monthly schedules. Lawsuit lenders prefer the term "growth rates" to "interest rates," but with a monthly schedule the two are nearly identical. 'Growth Rates' vary based on the type of suit. They are lower for auto accidents, higher for medical malpractice, different again for cases that settle pre-trial.

As an example, one firm advertises a "growth rate" for an auto accident case as somewhere between 2.50% and 3.99%. These rates are calculated monthly, so in the second month the growth rate will apply to the principal plus growth rate accumulated in the first month.

Some firms also offer a flat rate, also based on time. If a case takes up to six months, the repayment cost is 1.4 times the loan. If the loan is $5,000, the repayment cost is $7,000. If the case takes between seven and twelve months, the multiple is 1.6, meaning that repayment cost is $8,000. It’s a costly option, but with no risk it’s a good choice for a plaintiff with no other sources of funds.