Why Litigation Loans Are Dangerous: What You Need to Know

If you’re involved in a personal injury case and facing financial strain, you might have heard about litigation loans (also called a multitude of different names such as lawsuit loans, settlement loans, and legal financing). These loans promise quick cash by advancing money against your expected settlement. While these loans can at first seem like a lifeline for your medical bills and wage loss, litigation loans often come with serious risks that can harm your case and your financial future. 

Here’s why litigation loans are generally considered a bad idea and what you should be aware of before considering being restricted by one.

What Are Litigation Loans?

Litigation loans are cash advances provided by third-party companies based on the anticipated outcome of your lawsuit. You don’t repay the loan unless you win or settle your case, but if you do, the lender takes a significant portion of your settlement, often much more than a typical loan interest.

Why Litigation Loans Can Be Harmful

Extremely High Fees and Interest Rates

Litigation loans often carry exorbitant fees and interest rates, sometimes even exceeding 100% APR. This means you could end up paying back two or three times the amount you borrowed or even more.

Reduces Your Settlement Proceeds and Creates Financial Pressure

Since repayment will come directly from your settlement, a large chunk of your compensation goes to the lender instead of covering your medical bills, lost wages, or living expenses. Additionally, the pressure of the loan can influence your decision of whether you settle your claim or risk going to trial. So not only can you be forced to pay an exorbitant amount for the loan, the loan might make the case resolve at a lower number.

Complicated Terms and Hidden Costs

Loan agreements are often purposely complex, wordy, and difficult to understand. Most people sign off on the agreement without reading or fully understanding the various ways in which the loan can affect the future of the case and their finances. Litigation loans usually come with hidden fees and penalties that can catch you off guard or leave you at a significant disadvantage in the end. 

Safer Alternatives to Litigation Loans

Consulting a Personal Injury Attorney

Most personal injury lawyers work on a contingency basis, meaning you pay nothing up front and only pay legal fees if you win. Personal injury lawyers are legally not allowed to loan or give you money, however they know how to evaluate your case and can estimate how decisions will affect the resolution of the case. The case itself might offer you more than one path to settlement, and one of these paths might be a better result than your best day with a litigation loan.

Payment Plans

Some medical providers offer payment plans. Try calling your medical provider and requesting a payment plan for your bills rather than paying them all up front. This can also prevent these bills from being sent to collections and damaging your credit. 

Personal Loans or Assistance

Explore family support, community resources, or even traditional loans with lower rates.

While litigation loans may seem like a quick fix and even a blessing at first, their high costs and risks can negatively impact your case and your financial circumstances after the case. Sometimes a litigation loan might be your only option, but you are usually better-served by exploring other financial options.

If you’re considering a litigation loan, talk to an experienced personal injury lawyer first before signing anything so that you understand all of the implications.