Every day, I speak with people who are in need of financial assistance, who have a personal injury lawsuit, and who have heard about litigation funding as an option available to them. I’ll be honest, I sometimes wonder how plaintiffs find out this industry even exists. Oftentimes, an attorney will do what he or she can to discourage their clients from pursuing a loan on their potential settlement. They have seen things go south fast. But when you’re desperate for help keeping the lights on and keeping your family fed, and you’re anxiously awaiting the relief a settlement can bring, you’ll do anything you can to find some support.
This leads most people to the internet, where a quick search for “legal funding” brings up pages and pages of results. There are hundreds of litigation funding companies nationwide, providing pre-settlement funding to plaintiffs at egregiously high interest rates. The non-recourse lending industry is not federally regulated, and only a few states have put into place guidelines that prevent these for-profit lending companies from operating there (Colorado and Arkansas are two examples). For-profit funders will often seek out plaintiffs in tough spots and essentially exploit them, loaning them money without making it clear what they might owe back once their settlement comes in.
Just the other day, a plaintiff told me of a lending company I had not yet heard about. I decided to do some research into them because she made it sound like their rates were pretty fair — and that would be rare. At first glance, I’ll admit, I thought they weren’t awful. They boldly advertise: “NO FEES, NO COMPOUND INTEREST, JUST 15% FIXED [interest].” Those interest rates are significantly lower than what the industry usually sees — around 3% compounding monthly on average, so essentially 36% at the end of one year. Many companies charge numerous arbitrary processing and other assorted fees on top of this. It’s not unusual for a plaintiff to owe over 100% of what they originally borrowed. I was intrigued.
Then I found the kicker: if you keep reading down below, the 15% fixed interest boldly advertised up top is actually only for a six-month interval. So if you took out an advance on your settlement and it took you a year to pay it back (which is not unrealistic), you’d actually end up paying 30% interest! If it took you two years, your interest would now be 60% of the amount you originally borrowed. What’s more, the way most of these arrangements work is that if it takes you a year plus one day, you’re automatically bumped into the next payment bracket. For example, if you borrow $1,000 and you pay it back in the first year, your payment would be $1,300 ($300 of interest, or 30%). If it takes you a year plus one day, your payment increases to $1,450 ($450 of interest, or 45%). That’s much different than the advertised 15%.
It is both frustrating and curious to me that few lawsuit lenders make an honest portrayal of what a plaintiff may owe after they take out pre-settlement funding. If you are thinking of taking out an advance on your settlement, make sure you really do your research. Ask to see a sample contract so you can assess any “hidden fees” and how the interest will truly accrue over time. Do not take out more money than you actually need, because it will just end up hurting you in the end. Litigation funders can be helpful — just know to have your guard up and to not blindly sign on the dotted line.