Navigating a lawsuit can be challenging, especially when financial strain adds to the burden. But did you know you could qualify for a pre-settlement loan while awaiting a settlement?

This type of legal funding acts as a bridge between the hardships of the present and the possibility of future compensation, allowing you to manage pressing expenses in the interim.

The best part?

You are only responsible for repaying the loan if you win your case. So, what’s the catch? Read on to learn how pre-settlement loans work, the upsides and downsides of this type of funding, and more.

What are pre-settlement lawsuit loans?

In the simplest terms, pre-settlement funding can be defined as money that you don’t have to pay back until after you receive your settlement. This isn’t a loan but risk-free money you can receive right now.

Pre-settlement funding emerged worldwide in the late 1980s in response to the legal system’s slow pace and the financial strain it causes individuals in legal disputes.

For example, in personal injury lawsuits, the person bringing the lawsuit (plaintiff) sometimes has to wait months or even years for their case to go to trial and a settlement reached.

This expensive and prolonged process can create economic hardship for the plaintiff, who may feel pressured to accept a lower settlement, especially if they cannot work due to injuries.

In such instances, the plaintiff may opt for pre-settlement funding to receive a portion of their expected settlement upfront in exchange for a portion of the eventual settlements.

Because settlement loan companies primarily approve cases with a high probability of success, this type of lawsuit funding discourages frivolous cases and steers the legal system toward resolving genuine claims.

At the same time, it provides enough financial resources to help prepare the case. Better preparation increases the chances of winning and receiving a fair settlement amount.

Today, pre-settlement loans are offered by private companies and are available for a broad range of legal cases, such as medical malpractice, personal injury, employment discrimination, and more.

The difference between pre-settlement funding and lawsuit loans

Some companies use the terms “lawsuit loans” and “pre-settlement funding” interchangeably, which can be confusing because they are actually different financial mechanisms.

To clarify, pre-settlement funding is a form of non-recourse debt that protects the borrower from being personally liable for the amount owed.

Once the case is settled, the borrower receives any remaining balance after the lender takes the loan repayment out of the settlement. Conversely, a lawsuit loan is a recourse debt. The borrower is personally liable for the amount owed, even if they lose the case.

Thus, pre-settlement funding is not technically a loan but rather a cash advance against it, whereas a lawsuit loan operates just like any other loan in which the borrower agrees to pay back the amount owed, whether they receive a settlement or not.

How pre-settlement funding works

Because the approval for a pre-settlement loan is based solely on the merits of your case, your financial situation is not a determining factor in the process. So lending companies don’t require a credit check, bank statement, collateral, or proof of income because repayment will come directly from the settlement.

For this reason, legal financing companies will generally only fund you if you have a high chance of winning your case, so eligibility is closely related to your case details.

For example, you should have:

  • Experienced damages or an injury caused by the actions of another person or by workplace negligence.
  • Representation by a licensed attorney willing to participate in the funding process. The motivation is that you have a more substantial chance of winning your case with professional help.
  • Strong evidence to prove the other person's (defendant's) actions and not your own caused the damage.

Pre-settlement loan repayment terms

Pre-settlement loan repayment involves a one-time payment only when your settlement is paid. Usually, your attorney is granted three to seven business days to repay the advance.

As mentioned, you only repay the pre-settlement funding if you’re awarded a settlement. Once the case is settled or you win a judgment, the settlement proceeds are generally distributed in the following order:

  1. Medical liens and fees
  2. Attorney and court fees
  3. Lawsuit advance (plus the lending company's funding fee)

After these payments are made, you receive any remaining balance.

The size of your pre-settlement loan is determined by how valuable the lender thinks your case is.

Because pre-settlement legal funding is repaid from your settlement or jury award, you don't have to make monthly payments or incur interest charges, making it a low-risk option.

By now, you probably think this sounds too good to be true. What’s the catch?

The downsides of pre-settlement funding

While pre-settlement funding offers the advantage of immediate financial assistance, you should know the drawbacks associated with this option.

Exorbitant interest rates

The average interest rate of pre-settlement funding is around 60% per year, while the best interest rates are around 41%.

Although there’s no burden to pay back the interest once a verdict is reached, these sky-high rates may leave you with little or no settlement money.

Added fees

Just like any other loan, pre-settlement funding comes with additional costs, such as:

  • Application fees to process the loan request
  • Processing fees to cover the administrative expenses of evaluating and managing the loan
  • Origination fees for processing and administering the loan
  • Prepayment penalties that may be imposed if the loan is paid off before the case is settled

Limited regulation

The classification of pre-settlement funding is hazy because it’s neither a traditional loan nor a pure investment. This ambiguity has made it difficult for regulators to determine and impose regulations.

Furthermore, it’s also a decentralized industry. Thousands of funding companies are operating across the United States, making it challenging for regulators to enforce compliance.

This has paved the way for unscrupulous pre-settlement funding companies to engage in predatory lending practices, enticing vulnerable borrowers to take out loans that are not always in their best interests.

High eligibility requirements

Pre-settlement funding eligibility is largely determined by your lawsuit's value and potential success, which is much riskier than financing a home or a car.

No matter how good your case is on paper, lawsuits are never a sure thing. A certain percentage of cases funded will inevitably go to trial and lose.

That’s why not all cases qualify for funding. Lenders will always assess the strength of your case and the likelihood of a favorable outcome before deciding to offer you a loan.

You only get a percentage of your settlement

Typically, pre-settlement companies limit their advances to a maximum of 10% of the estimated settlement amount if your case is not settled, and up to 20% if your case is resolved.

This means that if you expect to win $150,000 in compensation, your advance is capped at $30,000. Limits may vary from state to state, but it’s helpful to assume the 20% cap as a general rule.

An example of what a pre-settlement loan may cost

Let’s say you file a lawsuit against your workplace for $200,000 due to damages caused by safety negligence. A lender offers to give you $40,000 at 41% interest rate.

One year later, your case is settled for $200,000. After deducing attorney’s fees, litigation expenses, and medical liens, you are left with $100,000.

You must repay the $40,000 loan plus $16,400 in interest, leaving you with $43,600 in settlement money.

Now, let’s use the same example with a 60% interest rate.

In that case, you would need to repay the original $40,000 loan plus $24,000 interest, which leaves you with just $36,000 in settlement money. If your medical bills were higher, you would receive even less.

Top Settlement Funding Companies

With numerous pre-settlement funding companies available, choosing the right one can be daunting. Below are three reputable options:

Based in Los Angeles, Uplift Legal Funding offers pre-settlement funding to plaintiffs across the United States. Upon approval, you can receive funding ranging from $500 to $250,000 within 24 hours.

Uplift boasts an average interest rate of 20% and extends funding to cases involving personal injury, auto accidents, employment lawsuits, labor law, product liability, and more.

With a consistent 5-star rating from over 100 reviews, Uplift has established itself as a reliable pre-settlement loan provider. Their funding also has no spending restrictions, which provides more flexibility.

High Rise Financial

High Rise Financial, a Los Angeles-based pre-settlement funding company, eliminates the complexities of compounding interest and hidden fees, providing clear and straightforward funding options.

They have an impressive 96% five-star rating from over 370 Google reviews, and they provide a rapid approval process, typically within 24 hours, ensuring quick access to funding.

High Rise Financial deals with personal injury suits related to auto accidents and defective products but is also open to funding suits that stem from injuries caused by negligence.

Oasis Financial

Oasis Financial provides much-needed cash advances, ranging from $500 to $100,000. A streamlined approval process lets you receive your funding within 24 hours.

Recognized for its integrity, Oasis Financial holds an A+ Rating from the Better Business Bureau, earning the trust of over 250,000 satisfied clients.

Their reputation as a reliable partner for funding various cases, including auto accidents, workers' compensation claims, negligence lawsuits, premises liability cases, and more.

Pre-settlement loans: A lifeline or a trap?

Pre-settlement loans may seem like an oasis in a cash-dry desert, but with sky-high interest rates that can eat up a good chunk of your settlement funds, they may not be a wise choice.

Alternatively, you can take out a personal loan, use a low-interest credit card, or ask friends or family for help. If you’re unsure, seek advice from an attorney specializing in litigation or personal injury cases.