Pre-settlement funding, sometimes called a lawsuit loan or settlement advance, allows plaintiffs early access to cash based on a potential settlement or court award from their legal claim. It works like an advance or a payday loan – the plaintiff receives an upfront lump sum and repays it plus fees and interest out of their eventual settlement. With pre-settlement funding, financing is provided prior to the resolution of the case.
While these lawsuit cash advances give plaintiffs an influx of funds to cover expenses before their case concludes, the interest rates are usually sky-high. Pre-settlement funding should be considered very expensive financing.
What Factors Determine Pre-Settlement Funding Interest Rates?
When you apply for pre-settlement funding, the company will assess your request and examine several factors to decide the interest rate and fees they will charge. Key factors include:
Your Credit Score and History
Like other types of financing, a main criterion is your credit profile and history. Plaintiffs with very poor credit will likely get higher interest rates for a cash advance. If you have stellar credit, you may qualify for a lower rate.
Type of Case and Estimated Settlement
The funding provider will evaluate the details of your legal claim and the projected settlement amount. Cases likely to result in larger settlements in a shorter timeframe are seen as less risky and may obtain lower rates.
Expected Case Duration
The longer the case is anticipated to last before settlement, the higher the interest rate is likely to be. Cases expected to resolve quickly are seen as a safer bet by funding companies.
Competition Among Funding Firms
In the emerging market for lawsuit lending, competition among pre-settlement funders may influence rates. As more companies vie for business, some may offer lower interest rates.
Urgency of Plaintiff’s Need for Funds
If a plaintiff is in dire or urgent need of an immediate cash infusion, they usually have less leverage to negotiate favorable terms. Emergency requests may mean higher rates.
State Laws and Regulations
In states that cap maximum interest rates for financing, plaintiffs may enjoy lower rates. States with greater regulation of lawsuit lending may experience more competitive pricing.
Typical Pre-Settlement Funding Interest Rate
While there can be variation depending on the factors above, some general observations can be made about prevailing interest rates for pre-settlement funding:
- Interest rates usually fall somewhere between 2% to 15% per month. This equates to an annual percentage rate (APR) of 24% at the low end up to a whopping 180% at the upper end of that range.
- Smaller advances tend to have higher effective interest rates. For example, a $500 advance may have a higher rate than a $5,000 advance from the same company.
- In some states, laws cap maximum allowable rates. For example, New York limits rates to no more than 16% per year. However, many states currently have no interest rate limits.
- For illustration, let’s look at some estimates for repayment of a $10,000 pre-settlement advance at different interest rates:
- At 5% monthly interest, repaying the advance after 6 months would require total repayment of $11,500. After a year, the total repayment would be $13,000.
- At 10% monthly interest, the repayment of the $10,000 advance would grow to $12,500 after 6 months. After a full year, repayment of the $10,000 advance would total $15,000.
- At 15% monthly interest, repaying a $10,000 advance within 6 months would require total repayment of $13,500. After a year, repayment would total $17,000.
As you can see, at the higher end of interest rates, the total repayment amount quickly escalates and exceeds the original advance. The longer the duration before settlement, the greater the compounding effect.
Comparison Shopping May Reduce Interest Rates
To avoid simply accepting an arbitrary or excessively high interest rate, plaintiffs should compare offers from multiple pre-settlement funding companies. Some helpful tips include:
- Contact several highly-rated funding firms to obtain interest rate quotes and terms. Most will provide free, no-obligation quotes quite easily.
- Be upfront about your credit standing, legal claim details, and expected timing so quotes reflect your specific situation.
- Compare quotes to find the most favorable combination of low rates and reasonable fees. Ask detailed questions if terms are unclear.
- Negotiate with companies to request a lower interest rate or reduced fees if possible. Some firms may agree to beat a competitor’s offer.
- Avoid picking the first company that approves your request. Take time to thoroughly evaluate options.
The overall market is still maturing, so there are deals to be found for plaintiffs who do diligent rate comparisons. The interest rate offered on any pre-settlement cash advance is negotiable to some degree.
Read the Fine Print Carefully
While the interest rate is a primary cost factor, it’s also critical to scrutinize the fine print for any additional fees when considering lawsuit loan offers. Be alert for:
- Origination, application, processing, or underwriting fees – often 1% to 7% of the advance amount
- Late payment fees if the advance is not repaid on time per the terms
- Early repayment penalties if you pay off the balance before settlement
- Fees for changing the payment schedule or restructuring the advance
- Administrative fees for setting up payments or providing documentation
- Collection fees if the provider must take action to be repaid from settlement funds
In addition to noting fees, read the proposed contract thoroughly to be sure you understand:
- The interest rate, fees, and total estimated repayment amount
- The payment schedule and specific repayment terms
- Any penalties for late payment, default, or changes to the schedule
- Whether the interest rate is fixed or variable
- The process and requirements for repayment when the case settles
Don’t let urgency for funds rush you past the crucial step of scrutinizing the offer and proposed contract from the funding company. Ask questions and ensure you are clear on all terms before signing.
In Summary
Pre-settlement funding allows plaintiffs earlier access to money that may eventually come from settling their case. However, lawsuit loans or advances should be viewed as credit options of last resort because they come at an extremely high cost.
Interest rates vary widely but commonly fall in the range of 2% – 15% per month, translating to APRs from 24% up to 180%. Factors like your credit, case details, timing, and state laws influence the rate offered.
Carefully comparing offers from multiple funding firms can help identify a lower interest rate and more favorable terms. However, even at the low end of interest rates, the total repayment amount quickly compounds.
Read pre-settlement funding contracts closely to be aware of all costs and terms before accepting funds. Plaintiffs should view lawsuit loans as very expensive financing and proceed with caution.