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What You Need to Know About Pre Settlement Loans


7th Jun 2020 Managing your Money

What You Need to Know About Pre Settlement Loans
If you have ever filed a personal injury lawsuit, you probably know how difficult it is to maintain financial stability while recovering from your injuries. For many, the financial burden of an insurance claim or lawsuit is too much to handle, so they sometimes end up settling for lower compensation than they deserve.
However, a new option exists for those who can’t pay for living expenses while pursuing a case. Since the 1990s, pre-settlement loans have increased in popularity throughout the United Kingdom, Australia, and the United States. While they don’t function the same way as a traditional loan, pre-settlement loans offer plaintiffs a way to pay for expenses while they wait for their case to resolve. 

What is a Pre-Settlement Loan?

If one has ever asked “what is a lawsuit loan,” the answer is, a pre-settlement loan is a cash advance given to a plaintiff in exchange for a portion of their settlement. Much like traditional loans, pre-settlement loans carry an interest rate which is compounded monthly. However, the loan is non-recourse, which means the plaintiff does not need to pay it back if they lose their case.
Since the loan is non-recourse, lenders typically charge high interest rates comparable to payday loans. In general, most lenders charge anywhere from 27 to 60% interest on pre-settlement loans. This means that if you receive $10,000 from a lender at a 30% interest rate and you settle your case in one year, you owe the lender $13,000.

The Pre-Settlement Loan Industry Continues to Grow

There are several factors that contribute to the growth of pre-settlement loans throughout the world. According to an annual report from the United States Federal Judiciary, the total number of personal injury lawsuits filed in district courts doubled between 1990 and 2019. Legal experts Shuman Legal states that a personal injury attorney will often represent a client under a contingency fee agreement, so there is no payment to the lawyer until the client receives compensation. However, the usual contingency fee for Personal Injuries is one-third of the final judgment or settlement for the case. This can sometimes range as high as 40% if a lawsuit is necessary due to the tremendous additional time required to prosecute a claim. In addition, an article from the Defense Counsel Journal found that nearly 50% of federal class actions in Australia over the past six years used third-party litigation financing.

Types of Cases That Qualify for Pre-Settlement Loans

Since lenders take on tremendous risk by offering non-recourse loans, they don’t fund every type of claim. For example, most lenders require an applicant to have a lawyer representing their case. In addition, lenders only fund cases that have a high potential for success.
As a result, personal injury cases including road traffic accidents, medical negligence, and accidents in public places are more likely to receive funding. However, there are also pre-settlement loans available for some product liability and illness compensation claims.

No Credit Checks or Income Verification Required

When you apply for a pre-settlement loan, lenders never require a credit check, proof of income, or employment verification. Instead, underwriters evaluate the strength of your case based on documentation received from your lawyer. Generally, lenders give funds to plaintiffs who are near a settlement agreement or judgment. 

Plaintiffs Use Funds from a Pre-Settlement Loan to Pay for Almost Anything

Since lenders send money to plaintiffs by check, money order, or direct deposit, they don’t have any spending restrictions. In fact, most people who receive a pre-settlement loan use it to pay for rent, food, utility bills, auto repairs, and more.

Consider a Pre-Settlement Loan if You Cannot Afford Basic Expenses

If you are considering a pre-settlement loan, make sure that you consider all of your options. Since pre-settlement loans carry a high interest rate, you should only apply for one if you cannot afford basic living expenses like food or shelter. 
However, if you cannot wait for a settlement or judgment to pay for your bills, a pre-settlement loan may be the best option for you.
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