Nowadays, a relative newcomer to the list of “fast cash” loaning enticements is beginning to hit mainstream success, and it is suddenly attracting a high degree of attention from state legislatures. It is named a “lawsuit loan,” or if you are on the lending side, “lawsuit funding.”
Specifically, it is a cash advance that is loaned to plaintiffs pending settlements or judgments in civil lawsuits, commonly auto accidents and personal injury cases. It is a rapidly growing industry, netting $100 million in profits every year. However, they may not be a good idea according to legislatures.
According to the legislative opponents of the business, the service can be shockingly expensive, with some lawsuit loan borrowers paying an annual interest of over 100%. Justin Hakes, a representative for the U.S. Chamber Institute for Legal Reform, said that lawsuit cash advance lenders charge exceedingly high interest rates to their clients, more than 100% annually.
Hakes says that even when consumers “win” or settle their cases, they often find themselves receiving no money because all of the settlement or award goes to the plaintiff’s attorney to repay the lender.
Representatives of the lawsuit-funding business acknowledge that interest rates, which they call “funding fees,” are high, but claim the excessive costs are necessary because they are taking most of the risk. The borrowers tend to have lackluster credit ratings and very few other resources.
One great advantage borrowers have when eliciting these types of services is that, if they lose the court case, they never have to repay the loan. According to Eric Schuller, director of government affairs for Oasis Legal Finance, when he is successful on a case, the attorneys are paid first, followed by other liens on the claim, then any statuary liens on the claim, and only then is he paid.
Despite what Schuller says, legislatures say that who is paid and when does not alleviate any of the debt that will be left to the borrower. This is how it works:
The plaintiff calls a toll-free number or fills out an application. Many of these cash advance providers advertise on television and websites with slogans such as “Provide Cash to Plaintiffs NOW!” and “America’s Premier Cash Advance for Plaintiffs Source.” The lenders then contact the applicant and his or her attorney, assess the underlying case, and offer the cash. The average amount borrowed is in the $5,000 range.
After the case, the lenders begin to charge for the loan. Many charge 2% to 4% plus fees. This may sound low to potential consumers, but that rate is compounded monthly. Therefore, for a one-year $1,000 loan, you could end up paying $1,600 plus fees.
Legislators urge potential clients to understand the high risk involved in taking out a loan from these types of lenders and to look at other options to resolve their legal troubles.