Three Myths about Lawsuit Loans

May 13, 2010

When you are inquiring about any type of financing, whether it is for your car or home, it is vital that you know each detail about what it will entail: what are your obligations? What are you getting, and at what cost? It is no different with lawsuit funding. While it may be your last resort and last option with which you can pursue legal action, you do have to know what you are getting into – and, of course, what you are getting out of the funding.
There is a lot of confusion and misinformation around the issue of lawsuit funding. Picking out the mistruths is as important as picking out the truth. Here are three of the most common myths about lawsuit loans.

Myth #1
They are free, no-cost loans. 

What could be better? But there is no such thing as a free, no-cost loan. You wouldn’t expect your bank to issue you an interest-free mortgage, nor would you expect an auto dealer to forgo the five to nine percent interest he can earn from you. It is a mistake to think that legal funding is provided at no cost to you. If you hear of a funding company that is making that claim, you can be assured that there is more to the story and you’d better have your lawyer read the fine print very carefully.
A reputable lawsuit funding company will charge a rate that is competitive within the market; this will be more than that which a bank would charge on a loan, which is why honest companies tell you that you should exhaust all other options before opting for lawsuit funding.

Myth #2
Lawsuit funding is a loan.

 It is easy to mistake funding with loans. Lawsuit funding is an advance on your settlement or judgment. You do not have to make monthly payments; you will replace the advance if your case is resolved. With no-recourse funding, you will not pay back the advance if you lose your case. Lawsuit funding companies will fund your case depending on its merits, not your credit score. This means that even if you could not get a traditional bank loan, lawsuit funding may very well be available to you because the company considers a pending settlement or lawsuit an asset.

Myth #3
Lawsuit funding is usurious and exploits plaintiffs. 

It is true that rates charged by reputable funding companies can be high, but it is also true that they fully disclose this information and urge you to seek alternative methods of funding your lawsuit. A good company will have competitive rates but will also acknowledge that they are more expensive than traditional loans.
That being said, lawsuit funding is often the only option open to some people, particularly single parents and working people. If they cannot borrow against their home’s equity or obtain a traditional bank loan, they are left with few options. Lawsuit funding allows them to pay their bills and their lawyers while pursuing their case. Far from exploiting working people, lawsuit funding can provide them with the only means to receive redress for injuries or mistreatment.