Legal funding is a service for injured plaintiffs that provides upfront finances to help fund legal costs and other expenses while their case proceeds. Attorneys can also benefit from this type of funding that is made available through third-party companies. This is not a traditional loan and falls more into the category of a cash advance. The strength of a plaintiff’s case determines whether an applicant will be approved, and there is no repayment due unless the lawsuit is won or settled in favor of the plaintiff. On the other hand, traditional loans involve an immediate repayment system that carries on until the full balance is paid.
Companies that offer legal funding are predominantly used by individuals who do not possess many financial resources or have incurred expensive legal and medical expenses due to someone else’s negligence. Plaintiffs who obtain such funds can use them wherever a need exists. If household bills are rising through the roof during an extended litigation period, a welcome cash advance could quickly alleviate this worry. Additionally, if funds are needed for the litigation process itself, this need can also be met. Generally, most legal funding involves personal injury and mass tort litigation cases.
Why Legal Funding Is Not Considered a Loan
The legal funding that third-party companies provide to litigants gives a non-recourse cash advance to plaintiffs in exchange for a portion of the lawsuit’s final judgment or settlement amount. Some people mistakenly confuse the superficial similarities between this funding and those of a traditional, unsecured loan from a bank or other financial institution. However, legal funding operates quite differently than a traditional loan. Litigation funding works more in the form of venture capital or an asset purchase. Cash advances through legal funding do not get reported to credit bureaus because they are not debt. Additionally, a credit report is not necessary to receive this type of funding, so there is no effect whatsoever on a plaintiff’s credit rating.
Below are the main reasons why legal funding is not a loan:
- The client receiving legal funding has no absolute obligation to repay the finances. Third-party funding companies generally provide a lump sum payment to plaintiffs. Should the lawsuit end unfavorably, with the plaintiff losing, the funding company will not require any repayment. No win means no repayment.
- Legal funding is non-recourse. The third-party funding company cannot pursue a plaintiff’s other assets if the client’s lawsuit ends unfavorably with no win or settlement.
- Typically, a plaintiff is not required to pay any monthly fees after receiving legal financing. In general, no payments are made until a settlement or judgment is finalized. Settlement may not occur for many months or even years after legal funding has been received.
- The lawsuit itself is the main qualifying factor for funding. The plaintiff’s case must be strong enough that the third-party company believes its funds’ investment will be worth the risk.
- More risk is involved for third-party companies than collateral-based lenders would face. Because of this dynamic, a legal funding company requires a higher return rate for taking the risk. This concept is not unique. Unsecured credit cards automatically carry more risk than secured loans, so higher interest rates are tolerated in regulations for unsecured cards. Third-party companies word their agreements in a way that avoids any classification as a loan. This prevents their funding from being subject to the usury law caps placed on interest rates for credit cards and mortgage loans.
- Legal funding is even further distanced from traditional loans because lawsuit funding is a multilateral transaction. Funders take on a higher risk than that of a lender that handles unsecured credit cards because the credit card agreement is a bilateral transaction.
Evaluating Your Financing Options
Lawsuit funding companies can offer plaintiffs a variety of terms for customizing legal funding to meet specific needs. By knowing various available options, an individual can determine which method will be the most affordable and convenient. For example, some forms of legal funding offer a flat fee charge to recipients of the cash advance. Other types have a monthly interest rate. When a plaintiff believes the lawsuit could take quite a bit of time, it may be best to select the flat fee option.
Choosing the Right Lawsuit Funding Company
Prospective clients can choose from many legal funding companies. By contacting several different ones, rates and terms can be compared. In addition, the information received from multiple sources during this process can give an applicant greater negotiating power to receive the best possible terms and rates. Of course, the cheapest rate might not be the best overall deal because some funding companies still charge a fee even though a lawsuit does not end in the plaintiff’s favor.
Understanding Repayment Terms
The importance of fully understanding all repayment terms cannot be overemphasized. Any reputable funding company will not hide term changes or additional fees within the fine print section. Understand the exact cost and the terms under which a change might occur.
Is Legal Funding Right For You?
When plaintiffs and lawyers need capital but cannot use traditional financing routes, legal funding may be the perfect solution. Third-party companies provide clients with a cash advance that is calculated by determining the strength of a lawsuit. This financial boost allows attorneys to put together a strong legal case and build up their law practice. Additionally, plaintiffs can gain financial ground while a lawsuit works its way through the legal system.
For information about funding and how to apply for a cash advance on your lawsuit, contact The Legal Funding Group.