Personal Injury Lawsuit Loans: Read This Before You Apply

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

A personal injury lawsuit loan can provide financial relief while your case is pending. It’s not a loan in the traditional sense. Lawsuit loans are a cash advance against your future settlement proceeds.

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

Most injury victims have rent, utility bills, car payments, medical bills, child support, and other financial obligations to meet every month.  What do they do if they can’t earn an income due to their injuries?

If you’ve been injured and are out of work, you may be falling deeper and deeper into debt. You need money, right now. Applying for a personal injury lawsuit loan is easy. But it will cost you.

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

Lawsuit Loans Require an Attorney

Personal injury cases can go on for months, sometimes years. Your lawyer may be involved in lengthy negotiations with the insurance company or pre-trial discovery. Maybe you’re waiting on a trial date. Whatever the delay, your life still goes on, and there are bills to pay.

If you’re thinking about borrowing against your injury settlement to help cover expenses, you won’t get far if you’re handling your injury claim without a lawyer.

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.

Aside from ethical considerations, it doesn’t make financial sense for attorneys to lend money.

Most personal injury attorneys have more than one client. If they were to begin making loans, they would eventually turn into the same loan companies who already make settlement loans. It’s not something most attorneys want to do.

Specialized personal injury attorneys who represent injured victims in high-dollar 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.

Your Attorney Must Cooperate with a Lawsuit Loan

One of the requirements of getting a settlement loan is your attorney’s agreement to cooperate with the loan company. Without your attorney’s cooperation, you’ll have a tough time getting the loan.

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 lawsuit 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.

You and your attorney must sign an agreement guaranteeing repayment of the loan from the settlement proceeds.

When your attorney agrees to cooperate with a personal injury lawsuit loan company, they become a form of trustee for the company. 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.

How do Personal Injury Lawsuit Loans Work?

Lenders who offer lawsuit loans typically advance money for personal injury claims such as:

  • Car accidents
  • Product liability
  • Premises liability
  • Wrongful death
  • Medical malpractice

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

Whether you have good credit, bad credit, or no credit at all, as long as your settlement amount will be large enough to repay the loan, you’ll usually be approved.

You can apply online to several loan companies. 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 the loan if your case doesn’t settle or you lose in court. That rarely happens, as most loan 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 lawsuit loans are usually small. Yet, because personal injury finance companies are unregulated by state and federal law, interest rates and processing fees on lawsuit 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 may end up with nothing by the time your injury claim is settled. It’s important to know what’s out there, so you can choose wisely.

Similar to “payday loans,” interest on personal injury lawsuit loans 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 “charge 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 lender with a lower rate who will charge simple interest on their lawsuit loan, 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 percent 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 it’s something you want to avoid 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 Calculation

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 45 percent per year, calculated monthly.

If it takes two years for your case to settle, you will owe the loan company a total of $12,702.05.

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 lawsuit 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 the loan. Worse, some have gone into debt.

Here’s what might happen to your $25,000 settlement:

  • Attorney fees of 33.3 percent = $8,315
  • Lawsuit Loan Payoff = $12,702.05
  • Medical Liens = $5,000

In this scenario, you end up still owing more than $1,000 after your settlement is long gone.

Be flexible about settling your claim. When considering a settlement offer, ask your attorney to explain how the funds will be distributed. 

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

If you settled your claim for $20,000 after one year:

  • Attorney fees of 33.3 percent = $6,660
  • Lawsuit Loan Payoff = $8,166.14
  • Medical Liens = $5,000

In this version, you won’t pay as much interest on your loan, so you’ll pocket $174, and won’t carry any debt.

A personal injury lawsuit 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.

Tips for Getting a Lawsuit 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. For example:

  • 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 lawsuit loans.

Choosing a Lawsuit Loan Lender

Don’t use loan brokers. Brokers charge higher fees. Deal directly with a lawsuit 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.

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.

  • 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 don’t charge for their initial consultation. There’s no cost 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 >>