Getting a Loan on Your Personal Injury Settlement: Avoid These Dangers

Get the facts on personal injury settlement loans. Find out if a loan is right for your situation, and what that cash advance will really cost you.

A settlement loan is not a loan in the traditional sense. It’s a cash advance against your future settlement proceeds. You must be represented by a personal injury lawyer to apply for a settlement loan.

Personal injury loans, also called lawsuit cash advance, settlement advance, pre-settlement funding, lawsuit settlement loan, or non-recourse financial assistance, are a controversial form of high-interest financing that is not regulated by most states.

If you’ve been injured and can’t work, you may be struggling to pay your bills. You need money, right now. Applying for a personal injury cash advance is easy. But it will cost you.

Here’s what you need to know before getting a loan against your injury compensation.

How Personal Injury Settlement Loans Work

The security for your loan will be the value of your case, specifically your expected injury settlement or jury award. You normally won’t have to put up any other collateral to secure the loan.

Unlike traditional loans, there’s no credit check and you don’t have to be employed to qualify for a settlement loan. Whether you have a good credit score, bad credit, or no credit at all, so long as you have a strong case and your settlement will be large enough to repay the loan, you’ll usually be approved.

Lenders who offer lawsuit loans typically advance money for personal injury claims, like auto accident and slip and fall cases.

You can apply online to several loan companies. Some companies charge a fee to apply. On the application, you’ll describe the details of your case and give your attorney’s contact information. After speaking with your attorney, the loan company sends your application to an underwriter who evaluates your case.

Underwriters look for similar fact patterns and study the average settlement amounts for cases like yours.

If the loan company decides your case will probably settle for enough money to repay the loan, they will give you the money.

Lawsuit loan companies typically won’t lend more than 20 percent of your estimated case value. If the loan company thinks your case will settle for $25,000, the most they’ll advance is $5,000.

Depending on your loan agreement, you might not have to repay it if your case doesn’t settle or you lose in court. That rarely happens, as most companies won’t make a loan unless they are sure they’ll get their money’s worth out of the arrangement.

Understanding Lawsuit Loan Fees and Costs

Personal injury loans are usually small. Yet, because personal injury finance companies are unregulated by state and federal law, interest rates and processing fees on these loans are extremely high.

You may only get an advance for up to 20 percent of your claim value, but with a high-interest loan, you could end up with nothing by the time your injury claim is settled.

Similar to “payday loans,” interest charged by lawsuit funding companies can run anywhere from 30 to 60 percent per year, with some rates reported as high as 200 percent. Lenders with outrageously high-rate loans often prey on disadvantaged, financially desperate injury victims, giving all lenders a bad name.

You Will Pay Loan Fees

Most lawsuit loan companies advertise “No up-front fees!” That’s because they add the fees, which can be substantial, into the loan balance. Fees might be charged at a flat rate or a percentage of your loan.

Fees might be called:

  • Application fees
  • Processing fees
  • Origination fees
  • Review fees
  • Underwriting fees

Calculating Loan Interest

If you can find a loan funding company with a lower rate that will charge simple interest, you can save a significant amount of money, compared to lenders who charge compound interest.

A $5,000 advance plus $250 in fees is $5,250 in loan principal.

Simple interest of 45% over two years on $5,250 adds up to $9,975 to be paid back from your settlement.

Interest for most pre-settlement loans is calculated with compound interest, meaning you end up paying interest on the accumulating interest.

Compound interest is terrific if you want to see your personal savings account grow, but you want to avoid it when borrowing money. Compound interest can rapidly add to the final cost of your lawsuit loan, especially when the interest is compounded monthly.

Example: Compound Interest Adds Up 

Let’s say you borrowed $5,000 against your anticipated $25,000 car accident settlement. The loan company added $250 in fees, for a total loan principal of $5,250.

The interest rate is 3.5% per month, compounded monthly. Paying 3.5% interest doesn’t sound bad, until you discover you’ll actually be paying an effective interest rate of more than 51% annually.

If it takes two years for your case to settle, you will owe the loan company $5,250.00 principal + $6,737.47 interest for a total of $11,987.47, which is more than twice the amount you borrowed.

Although your settlement may be substantial; you’ll still have to pay your attorney’s fees and costs.

Then you’ll have to pay back your personal injury settlement loan and pay off any liens against your settlement.

Unfortunately, there are many cases of people who have ended up with little or no money after paying their attorney’s fees, medical liens, and their settlement loan. Worse, some have gone into debt.

Example: Insufficient Settlement Amount

John took out a $5,000 settlement loan after a traffic accident. The company charged $250 in fees and 45% annual interest, compounded monthly. He used the loan money to pay rent and cover his living expenses for the five months he was out of work after the crash.

It took two more years and filing a lawsuit before the at-fault driver’s insurance company settled John’s personal injury case for $25,000.

John’s settlement was not enough to cover his accident-related obligations.

  • Attorney fees of (33.3 percent): $8,315
  • Attorney costs (court filing fees, copies, etc.): $1,200
  • Medical Liens: $5,000
  • Lawsuit Loan Payoff ($250 fees and 24 months interest): $12,702.05
  • $8,315 + $1,200 + $5,000 + $12,702.05 = $27,220.05

John is left owing $2,220.05 after his settlement funds are disbursed. 

Some loan contracts stipulate that the company will take the loss if your settlement isn’t enough to cover your total loan cost, but many don’t.

It’s up to you to find out how the funds will be distributed before you sign for a settlement loan, for example, if medical liens or past-due child support liens are paid before the loan company gets paid out of what’s left.

Do the Math When Considering a Settlement Offer

Stay on top of the interest accumulating on a settlement loan. When the at-fault party offers to settle, calculate what the loan company will get now, and how much more you will owe if you spend another six or twelve months fighting for a bigger settlement.

Using the same example of a $5,000 loan, what if you decided to accept less money to get your claim settled faster?

Example: Settling for Less to Save Money

John took out a $5,000 settlement loan after a traffic accident. The company charged $250 in fees and 45% annual interest, compounded monthly.

A year later, John’s attorney settled his personal injury claim for $20,000. No lawsuit was filed.

  • Attorney fees of (33.3 percent): $6,660
  • Medical Liens: $5,000
  • Lawsuit Loan Payoff ($250 fees and 12 months interest): $8,166.14
  • $6,660 + $5,000 + $8,166.14 = $19,826.14

John walks away with $173.86 in his pocket after his settlement funds are disbursed. 

A personal injury settlement loan might still be your best option, so long as you are clear on the terms of the loan, including fees and costs, and work closely with your attorney.

Settlement Loans Require an Attorney

One of the requirements of getting a settlement loan is your attorney’s agreement to cooperate with the loan company. You can’t get a settlement loan if you decide to handle your own injury claim.

Because the loan company has a financial interest in your case, they’ll want to know how much your case is worth and the strength of your claim. Your attorney must be willing to confirm the facts of your case.

Most personal injury attorneys will do everything they can to dissuade their clients from getting a settlement loan. Not only because they don’t want to deal with a finance company representative, but because you’ll have to waive your attorney-client privilege to cooperate with the loan company.

Even with your consent, it’s still not a good idea. Once your attorney hands over any portion of your file, you’ve lost control over where its contents may wind up.

Your attorney’s reluctance to breach the attorney-client privilege is based on their legal duty to act as your fiduciary, meaning their obligation to protect your best interest at all times. That said, your attorney can not prevent you from getting a loan.

You and your attorney must sign an agreement guaranteeing repayment of the loan from the settlement proceeds. To facilitate your loan, your attorney must agree to protect the company’s interest and make sure they get their money before you get yours.

Your Attorney Can’t Loan You Money

Professional ethics prohibit an attorney from loaning money to a client as an advance against the client’s settlement proceeds. If the attorney loaned you money, they would have a personal stake in your case. In legal terms, that’s a conflict of interest. The attorney could lose their license to practice law.

Specialized law firms that represent injured victims in medical malpractice and product liability cases often advance legal costs in preparation for trial, but will not advance cash to clients.

Reputable attorneys will advance funds to pay for legal costs such as court fees, deposition expenses, and expert witness fees. Advancing costs is an ethical practice that spares the client from having to come up with the money needed to support their lawsuit.

3 Tips for Getting a Settlement Loan

Before deciding to take out a personal injury lawsuit loan, try to minimize your expenses and get the money you need from other sources.

1. Consider Alternatives

Alternatives to a lawsuit loan include:

  • Letters of Protection: Rather than borrow money at a high interest rate to pay for your medical treatment, see if the medical provider will accept a Letter of Protection that promises to pay them out of your settlement.
  • Bank Loans: Talk to your bank or credit union about a personal loan. The interest rates and terms are regulated by the government and will be much lower.
  • Friends and Family: Try to borrow money from friends or family. You can offer to sign a promissory note to pay them back after your case settles, but you won’t be paying high interest.
  • Credit Cards: Use a credit card to pay your bills. Credit card companies are also regulated, so even “high rate” credit cards charge less interest than settlement loans.

2. Choose a Lender Carefully

Don’t use loan brokers. Brokers charge higher fees. Deal directly with a loan company. If you’re not sure, ask the company if they’re making the loan directly to you or if they’re referring you to a loan company.

Check into several lenders. Compare interest rates, fees, and terms.

  • The best terms are simple interest, calculated annually.
  • Ask questions. The lender isn’t doing you a favor. You will be paying a lot of money for your cash advance, so be sure you know exactly what you’re getting into.
  • Try to ask the same questions of every lender, for example, “If I borrow this much, what would I owe you in two years?”
  • Do your own calculations using the proposed rates and terms from each lender. There are free calculators online if you need them.
  • Confirm that you won’t have to repay the advance if your case doesn’t settle or you lose in court.
  • Find out what your obligations are if the settlement isn’t enough to repay the loan.

3. Work with Your Attorney

Your attorney is looking out for your best interests. Value their advice and counsel, even if it may not be what you want to hear.

Protect yourself:

  • Never sign any contracts or loan agreements until your attorney has reviewed them for you.
  • Ask your attorney to explain how your final settlement will be distributed between attorney fees and costs, your loan payoff, and medical bills.
  • Listen to your attorney when it comes to settling your injury claim. Holding out for more money might mean less in your pocket in the long run.

If you don’t have an attorney yet, keep in mind that most attorneys offer a free consultation to accident victims. There are no upfront costs and no obligation to find out what an experienced attorney can do for you.

Charles R. Gueli, Esq. is a personal injury attorney with over 20 years of legal experience. He’s admitted to the NY State Bar, and been named a Super Lawyer for the NY Metro area, an exclusive honor awarded to the top five percent of attorneys. Charles has worked extensively in the areas of auto accidents,... Read More >>