A lawsuit loan is an advance on the money you expect to win from a lawsuit. A loan company gives you cash now and you pay them back when your lawsuit finally settles or when you win at trial. Maybe you’ve heard ads on late night TV saying “Get your settlement now!” or something like that. It shouldn’t surprise you that these promises are too good to be true. Or at least too good to come without a huge catch: The interest and fees are so high that you can end up owing double or triple what you borrowed in a very short time.
Lawsuit loan companies get away with this because they’re not regulated in the way that other lenders are regulated. Regulation not only puts caps on interest rates but it requires disclosure and transparency. In the lawsuit loan business, rates are exorbitant and pricing information is vague or nonexistent. The companies get away with this by claiming they are not actually lenders because the clients don’t have to pay the loan back if they lose their case. They define it as an advance or something else that isn’t exactly a loan. Some call it pre-settlement lawsuit funding. In reality, it’s a loan, and one that is very, very costly.
Lawmakers in Illinois are finally addressing the problem. Some recently proposed legislation would cap interest at 36% and limit the final loan amount to the amount of the actual lawsuit award. This is progress, but I don’t think it goes far enough. These companies should have to explain the type of interest they are charging, and show the consumer what they will owe on their loan in six months, a year, etc. If it’s going to be allowed at all, it needs to be very clear what people are getting into.
For someone who has been injured in an accident, is unable to work and unable to pay the bills, an easy loan can seem like a godsend. These companies are preying on people who are under a lot of financial stress. Not every person who borrows money this way ends up getting screwed. But there are many people who are getting a terrible deal while the loan companies are making a huge profit.
Lawsuit “funding” companies should be called what they are – lenders – and regulated accordingly. Until then, if you are considering a lawsuit loan, please talk to your attorney about it first and make sure you fully understand what you’re in for.
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