You may have seen advertisements on television for legal finance loans and wondered what they are all about. Offering to provide you with the money needed for securing a lawyer to pursue a lawsuit in exchange for some of your settlement funds, many people may find this to be an enticing deal when they can’t afford a lawyer. While these loans make big benefit claims, they may not always deliver or could leave you with a big bill at the end of your case.
Many of these lenders boast about no credit checks, application fees or payment required until your case is won. Sounds like a great deal right? Well, these loans aren’t always what they seem and a closer look may reveal some hidden terms and conditions that could cost you.
First, it is important to know that the reason these loans don’t require a credit check or repayment until the case is won is that they are highly selective with their lending practices. Since the loan won’t need to be repaid unless you win your case, the lender must make sure your chances of winning are very high in order to minimize their risk in lending. Further, not all types of lawsuits will qualify. Many of these lenders won’t offer financing for things such as personal injury, civil disputes or even some suits against corporations.
Also, these loans are generally non-recourse loans, meaning they are limited in terms of their collection potential. In a non-recourse loan, a lender is not able to go after assets if the borrower defaulted. However, most non-recourse loan lenders require some collateral to be secured against the loan in the event of default. In a legal finance loan, the collateral is typically a substantial portion of your settlement funds. It isn’t uncommon for a legal finance loan to require upwards of 30-40 percent of your settlement funds to satisfy the debt, depending on the original loan amount and type of lawsuit. The most important point here is that what a borrower will end up repaying is far higher than would be repaid if a traditional bank loan was obtained to fund the lawsuit.