You may have seen the ads on TV — “Cash for injury and employment cases!” These lawsuit loans should be a choice of last resort. But if you’re considering one, asking yourself these key questions first can help keep your costs down.
You may have seen the ads — “Don’t wait! Get your lawsuit settlement now!” — promising financial relief for people waiting on a cash settlement. If you’re someone who’s been hurt in a car crash, unable to work and watching unpaid medical bills pile up while you wait for a court settlement, these ads just might catch your attention.
While these loans (sometimes called pre-settlement loans) can be a lifeline for some, they can come with exorbitant costs, experts say, and should only be considered as a last resort.
“It’s a very valuable service to someone who can’t get the money they need,” says Mark Bello, CEO of Lawsuit Financial Corp., in Southfield, Mich. “If you’re going to settle the case early and inexpensively, I don’t recommend the service to people. I would suggest not to do it until you can’t pay your bills.”
If you decide a lawsuit loan is your only option, it’s crucial to do your homework. Make sure you know the right questions to ask and what to expect so you can keep potentially prohibitive costs to a minimum.
How these loans work
Here’s how lawsuit settlement loans work:
- A client — typically someone involved in a car accident or work-related lawsuit — is awaiting a settlement. Oftentimes, the client is strapped for cash because he’s been unable to work following the accident. However, sometimes a potential client may just be eager to get his hands on a potential windfall.
- He contacts a lawsuit loan company and that company determines, with the help of the client’s attorney, how likely it is that the case will settle in the client’s favor and what the likely payout will be. Only the most promising cases will be considered.
- If the company decides to make the loan, the clients’ attorney and the loan company negotiate the terms of the advance — including the length and the amount of the loan, as well as any fees and interest. Then a contract is signed.
- If the client wins his lawsuit, the loan company gets paid from the proceeds, plus hefty fees and interest.
- If the client loses, he is off the hook for repayment. If the settlement comes in lower than expected, the client’s attorney may try to negotiate lower fees from the loan company.
Whatever size settlement you’re anticipating, don’t expect to be able to borrow against the whole amount, says Brian Garelli, president of Chicago-based Preferred Capital Funding. “Say you have a case that’s worth $10,000,” Garelli says. “The lawyer takes a third of that when it’s settled. That’s pretty standard for personal injury cases. Then there are usually medical liens to be paid. Those liens are generally limited to a third of the case. The other third is the client’s portion. When we do a loan, we’re lending on that piece.”
Beware of high rates and fees
Hefty interest rates and fees are the chief downside of the industry. It is not uncommon for a client to end up paying anywhere from 30 percent to 120 percent in interest and fees — including application fees, administration fees and more — on the amount borrowed over the life of the loan. Rates are not federally regulated, and companies can decide whether to charge a flat annual interest rate or charge a per-month interest rate.
Gary Chodes, founder and CEO of Oasis Legal Finance in Northbrook, Ill., and a founding member of the trade association for the industry, the American Legal Finance Association (ALFA), says a lawsuit loan of $1,000, depending on the length of the loan, “might typically result in repayment of $1,300 on the low side and $2,200 on the high side.”
Garelli, with Preferred Capital says his company’s clients pay a straight 40 percent annual interest rate on the amount they borrow. No other fees are added on. He also says his company typically won’t accept a case that will take more than two to three years to settle.
Those high rates have consumer advocates advising borrowers to find another solution.
“Consumers in financial straits should look for a lower-cost loan,” says Odette Williamson, a staff attorney with National Consumer Law Center in Boston. “The industry is using consumer straits to justify lending money at astronomical prices.”
Buying some time
John Smith, from New Jersey, whose real name is not used because his settlement terms are confidential, was in desperate financial trouble when he applied for a lawsuit loan last year.
He had filed an employment discrimination suit after he was fired from the company for which he worked for 25 years shortly after a prostate cancer diagnosis at age 57.
Smith said he drained his 401(k) over two years while he looked unsuccessfully for a job, and since neither he nor his wife had any income, he was about to lose his home when he sought help. “I was broke. Absolutely broke,” Smith says.
Taking the loan was a bitter pill, says his attorney Cindy Salvo, a founding partner of Salvo Law Firm in Fairfield, N.J., but it gave Smith the freedom to wait and fight for a better settlement. The first settlement offer from his former employer was only about $60,000 — one year’s salary — but Salvo said she knew Smith had a solid case and that a much larger settlement was possible if her client could hold out long enough.
The lawsuit loan bought Smith six more months, which helped him reach a settlement of about $500,000.
“How can you say no? You don’t want to lose your house,” Smith says.
Using the proceeds from the settlement, he paid back the $20,000 settlement loan plus $6,000 (30 percent) in interest and fees, Salvo said.
There’s a reason for such high interest rates, says Bello with Lawsuit Financial Corp. Rates have to cover losses if a client doesn’t win the case, or when the settlement comes in way below the estimate. And while the lender consults with the client’s attorney upfront on the probability the client will win, the attorney can’t guarantee a settlement amount, so the lender assumes all the risk.
“In this market, a typical mortgage interest rate is between 4 and 6 percent. Ours are considerably higher than that — but we don’t have a house to foreclose on,” Bello says.
Questions to ask before getting a loan
Eugenie Eardley of Eardley Law in Cannonsburg, Mich, who has referred clients to Bello’s company, says if you are considering a lawsuit loan, you should ask yourself these questions first:
- How long do you expect to wait for the settlement? The longer it’ll take you to repay the loan, the more expensive it will be as interest charges will accumulate. “If you borrow $10,000 and can’t dream of a settlement in a year or two, it’s going to be an incredibly expensive process,” Eardley says.
- Do you have any other ways to pay your bills? Consider whether there are any other lenders you could approach — such as friends or relatives. Could you get a second job? If you’re unemployed, what are your prospects for finding a job?
If you determine your best option is a lawsuit loan, shop by rates, terms and best practices, says Chodes, who recommends seeking out one of the 21 members of ALFA, or at least a company that adheres to ALFA’s list of best practices, which cover matters including potential conflicts of interest, false advertising and amount of funding. All ALFA members agree to abide by standards set out by the organization regarding transparency and disclosure in terms and relationships.
More tips to consider
Chodes also gives these tips when looking for a lawsuit loans:
- Ask about application fees: Most companies don’t charge them, Chodes says. If the company charges one, ask if it can be waived.
- Involve your attorney in the choice of companies: You must be represented by an attorney to be considered for a lawsuit loan. The attorney can help you negotiate terms.
- Ask about interest rates and compounding: If a company advertises an interest rate of 3 percent, ask how often the interest is compounded. It could make a huge difference in the final amount.
- Find out whether there’s a cap: Some companies will stop adding interest or fees after a designated length of time.
- Check for conflicts of interest: Make sure the lender has no financial ties to a medical provider or lawyer involved in your case.
Once you choose a company, the loan can be obtained much more quickly than a conventional loan — often in less than a week — because you don’t have the usual credit checks. The tough part is convincing the lending company that your case will result in a substantial settlement. Because the company assumes all the risk, only the most promising cases will qualify.
“We invest in lawsuits, not in people,” Bello says. “Therefore, their credit situation, their income situation, the amount of money they have, their credit report — none of that matters to us. What matters to us is whether they have a case with a good chance of success.”
See related: How foreclosures and other mortgage defaults impact credit, Tips for jobseekers with bad credit