Conventional loans are in the news frequently. In fact, it often seems that as a nation we are in love with the idea of borrowing money. In 2006, household debt as a percentage of income was at a historic high of 130% and has been climbing ever since. Many households have more than one credit card as well as debt in the triple figures; so many households are very familiar with how traditional loans work.
With a traditional loan, a lender evaluates your credit worthiness by checking your credit score and employment status, and then offers you a loan and an interest rate. You get your money quickly, but you generally have to start repaying your debt – be it a line of credit or a credit card – immediately with monthly payments. Monthly payments are usually a little more than the minimum interest amount on the loan, so paying just the minimum will usually leave you in debt for years – and leave you paying interest to the lender.
Lawsuit advances are often called lawsuit loans, but they are in fact very different from traditional customer loans. Lawsuit advances are a way for plaintiffs involved in lawsuits to get an advance against the expected proceeds of their case. Sometimes called lawsuit funding, these advances are a non-recourse form of funding, which means they only need to be repaid if and when a plaintiff wins a case in court or reaches an out-of-court settlement.
The differences between lawsuit funding and conventional loans begin well before the application process. To qualify for litigation funding, a plaintiff needs to be part of a legal claim or lawsuit and must have retained the services of an attorney. The plaintiff must approach a lawsuit funding company for a lawsuit advance. Banks and traditional lenders may offer an array of loan products, but they do not offer lawsuit advances.
The application process for lawsuit advances and traditional loans is very different. With a traditional loan, especially an unsecured loan, the borrower must go through a strict vetting process. The lender will generally check employment status, assets, credit history, and other details. In some cases, it can take days or weeks to get approval for a loan. In contrast, getting a lawsuit advance is much simpler. The plaintiff of a case must contact a litigation funding company and express interest in a lawsuit advance. The company will contact the attorney involved in the case and get supporting documents about the case. Based on these documents alone, the company will make a funding decision, often within a short time frame.
There is no employment verification or credit check with a lawsuit advance because this form of funding only needs to be repaid if and when the case is won or settled out of court. The plaintiff’s lack of assets, problematic credit history or unemployment is simply not a concern to the funding company when making their funding decision. Their decision is based almost entirely on the strength of the underlying case. If the plaintiff decides to accept the lawsuit advance, the funding company sends a copy of the contract to the plaintiff’s attorney to sign. Once the contract is signed, the funds can be released very quickly.
Another key difference between lawsuit advances and traditional loans is the cost. Traditional loans come with a cost known as an interest rate. Interest rates depend on current economic conditions and on the specific financial situation of the borrower. Therefore, a borrower with a better credit rating and assets to secure the loan can usually get a preferential interest rate.
With a lawsuit advance, no conventional interest is charged. Instead, lawsuit funding companies charge a risk premium in order to cover the risks associated with the litigation funding process. Since lawsuit advances only have to be repaid if a legal claim is successful, funding companies accept a high risk with every advance. For this reason, the risk premium associated with lawsuit advances is significantly higher than the interest rate on traditional loans. However, many plaintiffs find that lawsuit advances make sense because of the simplified repayment process and the fact that these advances only need to be repaid if a claim is successful. Plaintiffs who take out traditional loans will need to repay their loans – with interest – regardless of the outcome of their case and their ability to repay the loans.
Repaying traditional loans and lawsuit advances is also significantly different. Lenders offering traditional loans usually require monthly repayment, starting immediately. In contrast, with lawsuit advances there are no monthly bills to pay. Once a lawsuit is won or settled out of court, the proceeds of the case are placed in an escrow account. The attorney overseeing the case will withdraw legal fees from this account and will pay the lawsuit funding company before sending the balance of the settlement proceeds to the plaintiff. The plaintiff with the lawsuit advance never has to worry about payments to a lawsuit funding company, because this detail is handled by the attorney.
“FRA Financial Group Founder Joe RoosEvans is an industry veteran who has built one of the nations’ most successful Independent Marketing Organizations – Financial Resources of America and its affiliated companies, including FRA Financial Group.”