Beware "fast cash" lawsuit loans

A rapidly growing segment of the "fast cash" business involves personal injury lawsuit loans. Accounting for nearly $100 million in business every year, these loans promise cash now for money that will come to a plaintiff in a personal injury lawsuit later.

The temptation for a plaintiff is easy to see. Get much-needed cash right away in exchange for an uncertain future payout. According to lawsuit loan industry insiders themselves, this can benefit plaintiffs by allowing them to pay immediate medical expenses, avoid foreclosure and pay for other costs that cannot wait until the lawsuit is complete.

But this money comes at a high, high cost.

The extraordinarily high interest rates on these loans - sometimes in excess of 100 percent annually - means that even if a plaintiff does recover he or she might not see any money beyond what was obtained in the loan in the first place. This can mean a winning personal injury lawsuit results in the plaintiff ultimately ending up with far less money than he or she deserves.

Often the loan terms may couch the high interest rate in terms that appear reasonable. A "funding fee" of 4 percent per month doesn't seem extraordinary. But this "fee" is a compounded interest rate. For example, if a lawsuit takes a year or more to settle or go to trial - which is a distinct possibility - then the loan is going to have an annual percentage rate in excess of 60 percent. By comparison, current annual mortgage interest rates on a 30 year fixed loan are around 5 percent.

In order to justify these fees, the funding companies argue that they are giving "non-recourse financing" rather than traditional loans. This means that if a borrower does not win the case or settles for less than the amount owed back on the loan, the funding company will forgive the balance.

To illustrate, imagine a plaintiff borrowing $1,000 from a lawsuit funding company with a 4 percent funding fee compounded monthly. The plaintiff settles a case two years later for $2,000. The plaintiff, under the terms of the agreement, would owe the funding company approximately $500 in addition to the full amount of the settlement, or a total of $2,500. But the company agrees that they will not go after the full amount of money they are owed, instead happy to collect the full $2,000 settlement from the plaintiff. This allows the funding companies to argue that they are not subject to banking rules and lending laws.

Speak to your attorney first

If you have been injured and are seeking to file a personal injury lawsuit, you may have pressing financial concerns. Medical bills add up quickly and the injury may prevent you from finding work or continuing in your old job. But lawsuit loans should be considered only as a last resort and with the advice of your attorney. An experienced personal injury attorney can discuss with you the benefits and pitfalls of financing your personal injury lawsuit and may be able to recommend alternatives.