Hidden Costs of Pre-Settlement Advances—What to Watch For
There are a multitude of companies offering pre-settlement advances to injured clients. One of the major differences among them is the way rates and fees are charged and calculated. Many legal funding companies opt for a misleading methodology in quoting their costs, which can cause tension between attorneys and clients at settlement time.
Of course, funding companies need to cover their overhead and losses for cases with unexpected outcomes, as they are the ones assuming the financial risk when advancing settlement funds to injured clients prior to case completion. However, it is important that law firms and their clients select a company with reasonable fees and expenses outlined in a clearly worded contract.
Enticingly Low Interest Rates. Some litigation funding companies advertise low interest rates (2% to 4%) but if you read the fine print, you see that these are monthly rates (not annual rates) and many charge high origination, case handling and underwriting fees–often burying fee verbiage in the small print of the contract. This practice can make the cost of the advance to appear lower than it really is and can lead to misunderstandings and confusion for clients and sometimes even law firms.
Compounding Interest. You clients can find themselves paying interest on the administrative fee, principle, and on additional interest installments — causing each month’s interest accrual to be progressively higher than the previous month’s. This quickly accelerates fees to plaintiffs, making it expensive for clients on the back-end. Moreover, compound interest is difficult for both clients and attorneys to calculate and project the entire cost of the advance.
Look For Contract Transparency. The advance contract should simply state the amount owed upon settlement–without hidden fees buried in the fine print.
Some companies, such as Rockpoint Legal Funding, use a funding table where the total and true cost of the entire advance and amount owed at settlement is clearly displayed. By using a funding table, clients know upfront that if they “borrow x, they payback y.” Moreover, it eliminates the need to “calculate” cost since the true cost is already displayed in the contract.
Contract transparency makes it easier for clients to understand their ultimate payoff so there are no surprises throughout the process and easier for law firms and their staff to explain the cost of funding to their clients.