How Interest Rates Work in Pre-Settlement Legal Funding

Disclaimer: Consumer legal fundings and advances are not loans under applicable financing laws. Rockpoint’s products are non-recourse, meaning if you don’t win your case, you don’t have to pay us back. Receiving financial support in connection with a legal case is typically (and oftentimes incorrectly) referred to as a “lawsuit loan” or “loan.” Therefore, for the ease of search references, these terms may be used in this context to refer to our funding products, but we maintain our separateness from consumer loan products in all legal aspects. 

If you’ve had an accident and need quick access to cash, it’s easy to see the appeal of pre-settlement legal funding. Pre-settlement funding provides plaintiffs with immediate cash, and it’s much simpler to qualify for than a traditional bank loan.

However, one thing to watch out for is interest rates, which can take a big bite out of your settlement when it’s time to repay what you borrowed. This article explores interest rates and fees typically associated with pre-settlement funding. And if you live in the Grand Canyon State, check out our guide to pre-settlement funding in Arizona.

How Does Pre-Settlement Funding Work?

Pre-settlement funding provides instant cash to plaintiffs waiting for their cases to settle. Some companies refer to pre-settlement funding as a “lawsuit loan,” but it isn’t really a loan in the traditional sense.

This funding gives you a percentage of your expected settlement (around 10% to 20%) up front. When you win your case, you’ll pay back the amount borrowed from your settlement, plus interest and fees.

Although pre-settlement funding comes with fees, there are plenty of compelling reasons to apply:

• You have outstanding medical bills that your insurance won’t cover.
• Your doctor has suggested an experimental treatment that could help you after your accident, but the insurance company refuses to pay for it.
• You totaled your car in an accident and can’t wait for the insurance company to pay for repairs or a replacement.
• You can’t work because of your accident and need cash for rent and bills.

Pre-Settlement Funding Interest Rates Demystified

Pre-settlement funding companies make money by charging interest and fees on the amount you borrow, just like any other lender. Because interest can take a big chunk out of your settlement, especially if your case drags on for a long time, it pays to shop around for the lender with the fairest rates.

Lenders typically don’t charge a flat interest rate for every client. Instead, the interest rate is based on the strength of the plaintiff’s case. The more likely the lender thinks you’ll win your case, the lower the interest rate will be. On average, you’ll pay about 2% to 3.4% in interest per month, or around 41% annually.

Here’s an example: Suppose a funding company gives you a $10,000 advance with a 3% interest rate, making the interest $300 monthly. If your case settles a year later, you’ll owe the $10,000 you borrowed, plus $3,600 in interest ($300 x 12) for a total of $13,600.

One “gotcha” to watch out for is compound interest. If your funding has simple interest, you’ll only have to pay interest on the original amount you borrowed. If the lender charges compound interest, however, it’ll charge you interest on the amount borrowed and accumulated interest.

Compound interest is a bad deal because you could end up with little to nothing when your case settles.

Interest Rates Aren’t Your Only Expense With Pre-Settlement Legal Funding

In addition to interest, you’ll have to pay the lender’s fees once your case settles. Depending on the lender, fees can cost even more than interest. You could pay fees for:

• Origination
• Processing
• Underwriting
• Case management
• Document preparation
• Delivery
• And more

Before you sign on the dotted line with a lending company, be sure to ask about its fees. Good questions to ask include:

• What funding fees will you charge after my case settles?
• How much will I pay for each fee?
• How are the fees applied? Are they flat-rate or percentage-based?

Why Do Pre-Settlement Funding Companies Charge Interest?

The main reason funding companies charge interest is risk management. Unlike with a traditional loan, you don’t need to provide collateral, and there’s usually no credit check. That means you could be approved for funding even if your credit score is poor or you have no income.

This is risky for the lender because there’s no guarantee that you’ll pay back your funding. You don’t have to pay back a non-recourse loan if you don’t win your case.

Some lenders sneak excessively high interest rates into the fine print of your contract, then argue that they must do so because pre-settlement funding is risky. These lenders might charge interest of 100% or more annually, far exceeding a traditional loan’s capped rate.

Review the funding agreement with your lawyer before you sign to avoid being hit with excessive interest. If your lawyer tells you that the agreement is shady, steer clear.

How the Application Process Works for Pre-Settlement Funding

If you decide to move forward with pre-settlement funding, here’s how to apply.

1. Choose a funding company with fair fees and repayment terms, such as Rockpoint Legal Funding. Our funding contracts are always capped, so you won’t pay excessive fees if your case takes a long time to settle.
2. Gather supporting documentation, such as medical records and your attorney’s retainer agreement, and then fill out the online application. You’ll need to answer some questions about your case and expected settlement.
3. Wait for the company to review your application. If you’ve chosen to work with us, we can usually make a determination in less than 24 hours.
4. If approved, you’ll have cash in your account in as little as one business day.

Financial Relief With No Strings Attached

If you’re looking for a pre-settlement legal funding company with fair interest rates, you’ll love Rockpoint Legal Funding. Call (855) 582-9200 to learn more, or keep reading to learn how to maximize legal claims.