For victims waiting to receive class-action payments, a lawsuit settlement loan may seem like a quick and easy solution to their financial woes. A type of advance funding, a lawsuit settlement loan (sometimes called litigation financing or settlement funding) is a cash advance for an impending settlement award or lawsuit judgment.

Who Needs a Lawsuit Settlement Loan?

Lenders sometimes offer these loans to plaintiffs in personal injury suits and civil rights discrimination suits or to heirs waiting for the settlement of their deceased loved one’s estate. If you are a victim of a personal injury, such as a traffic accident or medical malpractice, you might have to wait months or even years before you actually go to trial and receive a settlement. In the meantime you may be unable to work, which results in a major loss of income. As your medical bills and living expenses continue to pile up, you may find your savings melting away. In this dire situation a lawsuit settlement loan may seem like an oasis in a cash-dry desert. However, it’s important to carefully weigh all of your options before you apply for one of these risky loans.

Sky-High Interest Rates

Because lawsuit settlement loans generally carry massive interest rates, they can quickly eat up a large chunk of the settlement money you are owed. In fact, interest rates for them often run as high as 27% to 60% a year. That means that if you take out a lawsuit loan for $30,000, you could pay up to $18,000 in interest each year. 

In the end you could wind up owing more loan interest than your actual settlement amount. Let’s say, in the scenario above, that it takes you two years to receive your settlement of $30,000. By then not only would you owe the lender the $30,000 you borrowed, but you’d also be on the hook for $36,000 in interest. Depending on the conditions of the loan, you could owe even more, as the interest on lawsuit settlement loans is usually compounded monthly.

Minimal Oversight

Lawsuit loans, which first came about in the 1990s, are relatively new to the financial scene. Perhaps that’s why these loans are not yet regulated by federal or state law. While state legislatures have started to consider regulation in recent years, lawsuit loans currently do not have the same level of consumer regulation as mortgages and car loans. With so few restrictions on lawsuit-loan interest rates, fees and services, it can be difficult for borrowers to make a side-by-side comparison of these loans. Even the terminology varies from lender to lender; while some may call it a “lawsuit loan,” others refer to it as a “settlement advance.”

Lawsuit-Loan Lawsuit

Considering all these risks, it’s no surprise that these advances/loans have stirred up some highly publicized controversy. For instance, in a lawsuit filed in February 2017, New York’s attorney general and the Consumer Financial Protection Bureau alleged that one lender scammed sick Sept. 11 responders and former NFL players who sustained concussion injuries with costly settlement advances. According to authorities the lender used unethical tactics, charging interest rates as high as 250% and exorbitant fees. The lender collected millions of dollars on these loans. 

The Bottom Line

If you are considering applying for a lawsuit settlement loan, you may want to think again. Not only do these high-risk loans carry huge interest rates; they are also mostly unregulated by the federal government. If you are the victim of a personal injury and struggling to pay your bills, consider other sources of money, such as insurance proceeds, disability payments or a personal loan from friends or family members.

If all else fails, consider borrowing from your 401(k) or other retirement account. While this should be considered a last resort, it’s still less risky than most lawsuit settlement loans. (For more, see Sometimes It Pays to Borrow From Your 401(k).)