How to calculate what you will have to repay when you take out a loan against a lawsuit settlement
Loans can be confusing. Lawsuits are almost always confusing. So, it's only natural to be completely overwhelmed when you put the two together and try to figure out your lawsuit loan cost.
Risks of using a lawsuit loan
First of all, there's no risk of having to pay back the money if you don't win your case. After all, you won't have your settlement to pay it back with, right? A good lawsuit loan company is not going to charge you anything if you lose.
That said, when you do receive a favorable outcome with a verdict or settlement, you're going to have to pay back the original loan amount plus a potentially large chunk of interest. Imagine, for all those cases that don't win, the lending company needs to recoup its costs from those that do.
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That said, lawsuit loans can provide a much-needed financial lifeline to individuals in difficult legal circumstances.
Some companies will include a payback chart with their loan agreement so you can easily see how any loan amount will accrue interest as time goes on.
Factors that impact lawsuit loan cost
It's important to know what type of interest a lawsuit loan company offers and the percentage rate before you sign an agreement. To gain a pretty firm idea of the actual lawsuit loan cost, you're also going to want to know how long your lawsuit will take. Given that no one can know going into a case exactly how long it will take, there's no way to accurately predict the cost of a lawsuit loan. We'll do our best to give you an idea of what to expect here.
Under the current law, lenders are allowed to charge un-capped and unregulated interest rates on funds offered to people pursuing lawsuits. According to reports, astronomical rates can surpass 200 percent, leaving the lendee with little to no money at the conclusion of their lawsuit. In most funded cases, the lawsuit loan company takes their cut of the settlement before the plaintiff or their attorney gets compensated.
Lawsuit loan costs - some basic calculations
Interest generally accumulates the longer you have a loan. The same is true with a lawsuit loan. If your case is wrapped up in three months, you'll pay three months' worth of interest. If it takes a year, your lawsuit loan will cost you more.
Interest costs
The important thing to research is if a company has compounding interest and how often it is compounded - sometimes it's compounded daily, weekly, or maybe only quarterly or yearly. Compounding interest defined simply means that you're paying interest on your interest. So, naturally, the less a loan company compounds interest, the better.
For example, let's say you borrow a $10,000 advance from a lawsuit loan company that charges a rate of 3% interest that is compounded monthly. Since you are charged on the borrowed principal AND the accumulating interest, the total amount you would owe after six months is $11,941. If your case drags on for a year, this number grows to $14,259. In two years, you would owe more than double your original loan amount for a total of $20,328.
As you can see, compound interest keeps building the longer your case drags on. This can be financially devastating in some cases and greatly reduce your final settlement amount after the lender has been paid.
The best type of interest is simple interest. Simple interest is never compounded, so you just have one flat interest rate.
For example, using the $10,000 loan example above with a 3% simple interest rate, after six months the borrow would owe $11,800.
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Although this is only $141 less than the compound interest loan, this gap grows substantially the longer a case plays out. In 12 months, the final cost to the borrower would be $13,600, and after two years that number would be $17,200 — that's $3,128 less than the compound interest loan.
Both loans started with the same interest rate of 3%, but the simple interest loan is substantially less costly in the long run. If the interest rate or loan amount is higher, these differences between simple and compound interest rates are even more sizable.
But how likely are you to find a low interest rate?
Pay close attention to is the interest rate itself. Some lawsuit loan companies charge close to 60% a year. With an interest rate that high, you could easily end up paying more back in interest than the amount you originally borrowed.
Kelly Kormada reports on the cost of a lawsuit loan of $3,000 per month. He says, "At the end of one year, if your interest rate is 50 percent, you owe $54,000 on a $36,000 loan."
Looking out for other fees: upfront costs and processing fees
Make sure to read the fine print because some lawsuit loan companies will try to sneak extra fees into their agreements that can add to the amount you pay interest on. They may seem like small fees at the time, but over the course of your loan, these fees can inflate the overall payback cost substantially.
These extra fees may go by the name of processing fees, application fees, underwriting fees, origination fees or review fees. Make sure the percentage or amount of these fees is minimal.
Calculating your overall lawsuit loan cost
So, how much does it actually cost? As you can see, there are a lot of factors that go into figuring out your overall payback cost for a lawsuit loan. But, no matter what company you work with, they should give you an easy way to figure out the approximate numbers for your particular case.
When calculating the cost of a lawsuit loan, be sure to consider your lender's interest rates and choose a company that offers a low simple rate. It's nearly impossible to predict exactly how long your case will play out, but you can make sure you get the most of your settlement in YOUR pocket by doing your homework.
Choose the right lawsuit loan company
The most important thing is to shop around, compare rates, and make sure you're working with a reputable lawsuit loan company. The rates and fees are going to vary some based on the type of lawsuit, how complex your case is, and what company you choose.
The lack of regulation in the legal funding industry together with the nature of lawsuits, with emotionally charged cases and high dollar amounts at stake, has turned some unscrupulous operators into predators. The New York Post and other news outlets have reported on the urgent need for reform in litigation funding. Unethical lenders are able to exploit cash-strapped individuals when they're most stressed and in need of help. We recently covered the story of women who were being persuaded to have medical mesh products removed to increase their potential settlement amounts, with tragic results.
Before you decide on a company and sign an agreement, send copies of all of the documents you receive to your attorney so he or she can look them over. Lawyers have more experience with lawsuit loan companies and they can easily detect red flags in an agreement. If there is something in your agreement that seems unfair, they may also help you negotiate with the company.
If you need help finding a good lawyer to help you through your case, check out our law firm directory.
See our guide Choosing a personal injury attorney.