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A lawsuit isn’t over just because you’ve reached a settlement. If waiting just isn’t an option, you may be tempted by the immediate relief of a settlement loan. It can help you stay afloat, but the expensive cost might mean you lose more than you gain.
Despite its name, a settlement loan isn’t a loan. Instead, you’ll receive an advance on the settlement you’re expecting after a successful lawsuit. It’s a type of emergency funding designed to cover personal costs involved in a lawsuit, including:
Settlement loans are also advertised as pre-settlement loans, lawsuit loans, lawsuit cash advances, litigation financing, lawsuit funding and settlement funding. If you come across any of these terms, you’ll know you’re looking at a settlement loan.
The most common place to find a settlement loan is through a lawsuit loan company in your province, although there are more and more popping up online. You’ll also find other types of companies offering advances that requires the defendant to pay the plaintiff in installments rather than as a lump sum.
If you’re considering a settlement loan, talk with your attorneys first. They might be able to point you to a legitimate settlement loan provider — or advise you against taking one.
There are a few common legal claims eligible for a settlement loan, including:
These loans provide you with a cash advance on a future legal settlement. You can apply for a settlement loan during the pre-settlement period of a civil case — or after you’ve filed the complaint, but before you learn about your settlement or a verdict. Pre-settlement can take months or even years, depending on the complexity of your case.
Most lawsuit settlement loans follow 5 general steps:
Settlement loans are expensive. Most lawsuit loan companies charge interest and a funding fee that adds up while you’re waiting for your case to settle. Others charge a monthly funding fee equal to about 2% to 4% of your loan amount. When you finally repay your advance, you could be looking at an APR of 20% to 120%.
Because you aren’t repaying the actual advance amount while interest and fees add up, settlement loans can be more expensive than your typical personal loan with a similar APR.
You may find a structured settlement company that charges a fixed fee when you receive your settlement, known as a discount rate. Discount rates can run 9% and 15%, though some companies charge more.
Most often, you won’t repay your settlement loan if you don’t win your case. It’s what contributes to the high cost of settlement loans: They’re highly risky for the lender.
However, approval for a settlement loan isn’t likely unless the company is convinced your case will win.
If you’re still earning money or aren’t totally dependent on the legal settlement, consider alternatives to expensive settlement loans:
Riskier options include borrowing against your house with a home equity loan or drawing from your retirement savings with an RRSP loan. If you’re not able to repay what you borrow, you could lose your home or savings.
Pre-settlement loans can help when you’re struggling to pay your bills while waiting for a legal settlement to come through. But they’re expensive, and they’re not yet as heavily regulated as payday and other loans, which means you’ll need to carefully research the lender you ultimately go with.
Learn more about potential borrowing options and compare lenders in our guide to personal loans.
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