Benefits and Disadvantages of Pre-Settlement Loans

Consumers should take additional precautions when considering businesses for pre-billing funding.

Individuals involved in filing a lawsuit may need cash for various expenses, including legal fees, as they await a final decision on the matter. A pre-settlement loan may be just what you need if you are in this position.

Pre-Settlement Loans Explained

Litigation can take years to resolve. It is also common for the accident that started the civil lawsuit to cause the plaintiff financial problems through lost work and additional medical bills.

Advance loan companies reduce the financial pressure on the plaintiff by acquiring the rights to the lawsuit from a plaintiff. A company can acquire some or all of the rights to a pending claim. The plaintiff receives cash compensation for the purchase while the legal process continues.

Advantages of the loan before the settlement

The main benefit of an advance loan is that the money is available to cover living and legal expenses while waiting for legal proceedings. The money from an advance loan can prove useful for:

  • Make mortgage payments
  • Pay medical bills
  • Replacing damaged property
  • Make payments for car loans

The plaintiff is likely to negotiate a better settlement for himself once he enjoys the financial relief of an advance loan. Once you’ve paid your bills and replaced lost wages, it’s much easier to be patient when evaluating billing offers. If you don’t feel the pressure of a pile of unpaid invoices, you have the option to decline all billing offers if none are satisfactory.

Colorful paper clips with business papers, calculator and pen; Image by Alexander Stein, via, CC0.

Instead, a plaintiff can take the case to court without worrying about the extra time that legal proceedings take.

Loan Concerns Before Settlement

The advance loan gives you the money you need to cover your expenses. However, this fact does not make this loan the best option for all claimants.

You will need to repay the money received on an advance loan once the financial compensation from a successful lawsuit is available. The principal amount borrowed plus all interest and fees must be paid in full. In some cases, this amount is double or more than the money received. One important point to keep in mind is that you never have to pay more than the full settlement amount to a loan company prior to settlement.

You may be able to save yourself some cash by not taking out an up-front loan. Other resources to consider include:

  • Insurance money
  • Disability payments
  • Installment loan
  • friends and family

A second disadvantage of pre-credit is that in some cases they can be a little tricky to qualify. Lending companies take great risk and want to know that there is a reasonable chance of getting their investment back. Plaintiffs may find it necessary to apply to a handful of companies before finding one to take their case.

Government protection

Both the state and federal governments are trying to protect consumers from predatory lending practices. These protections become relevant to consumers as they enter into financial transactions such as buying a home, applying for a credit card, or applying for an installment loan.

Advance loans are not regulated by the federal government. Some states offer protection against a settlement to consumers who are interested in credit. However, these protections are not as comprehensive as they are for other financial transactions.

Pre-settlement finance companies argue that the service they provide is not a loan. They claim that this is why the regulations that apply to credit companies are not relevant to them. The states have largely agreed to the companies and continue to allow the industry to operate without much oversight. Consumers should take additional precautions when considering businesses for pre-billing funding.

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