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.
What is a settlement loan?
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:
Medical bills
Lost income
Vehicle replacement
Rent or mortgage payments
Utility bills
Other living expenses
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.
What types of providers offer settlement loans?
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.
Is my claim eligible?
There are a few common legal claims eligible for a settlement loan, including:
Personal injury
Workers’ compensation
General negligence
Product liability
Premises liability
Civil rights
Wrongful death
Medical malpractice
How do pre-settlement loans work?
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:
The plaintiff in a civil case and their lawyer contact a lawsuit loan company.
The lawyer and the company calculate an estimate of how much the plaintiff is likely to win in their suit. If a win doesn’t sound likely, the company will decline providing an advance.
The lawyer and the company negotiate the amount, term, interest and fees for the advance. Advances often reflect your expected settlement minus your legal fees.
The plaintiff signs the contract and receives the advance.
The plaintiff doesn’t repay the advance until after winning the settlement.
Benefits of a settlement loan
Helps cover personal expenses. Settlement loans are designed to help you pay for personal expenses related to the situation or issue you went to court over.
Buys time to negotiate. If you’re short on cash, a settlement loan can help you afford extra time for your attorney to negotiate a fair deal with the defendant.
Helps cover the cost of a trial. If your lawyer isn’t able to negotiate a fair settlement, a settlement loan can help you afford court costs you’ll end up with.
You don’t pay if you lose. You typically won’t repay your advance — including interest and fees — if you lose your case.
What to look out for
They’re expensive. Offering rates that rival payday loans, lawsuit loans are generally best left for emergency situations.
Little provincial and federal regulation. Settlement funding is a relatively new service, and lenders don’t face as many restrictions as payday or personal loan providers.
Shady lenders. With so little regulation, hidden fees and unclear terms, you’ll want to carefully choose a legitimate lender when considering a settlement loan.
Your case may not qualify. To be eligible, the settlement loan company must think you have a good chance of winning your case. Some companies refuse to work with any case it thinks will last more than a few years.
How much does a settlement loan cost?
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.
Do I have to pay if I lose my case?
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.
5 tips to finding a legitimate settlement loan provider
Read customer reviews. They won’t always give you the full scope of what your experience could be like, but reviews are a good place to spot red flags like hidden fees or unclear terms.
Look for accreditation. Trade industries set standards that protect both lenders and consumers. While it’s not as effective as government regulation, businesses accredited with organizations like the Better Business Bureau (BBB) are theoretically held to some standards of business practices.
Ask about rates and fees. Try to avoid any company that’s unwilling to discuss your potential rates and terms after learning about your case. If the company charges an application fee, ask if they’re willing to waive it.
Get your lawyer involved. Your attorney may be able to guide you toward a legit lawsuit loan. Many lawyers have worked with settlement loan companies before, providing a better idea of providers on the up and up.
Watch out for conflicts of interest. Confirm that your lawyer doesn’t have a financial relationship with any lender they recommend before agreeing to continue.
Alternatives to settlement loans
If you’re still earning money or aren’t totally dependent on the legal settlement, consider alternatives to expensive settlement loans:
Personal loans. Canadian law requires that the APR be displayed on loan agreements, and in most provinces, the highest APR a lender can charge is 60% — around where settlement loans start. Loan amounts can potentially run up to $50,000, though lenders vary in the amounts they will put out. Borrowers typically have from 1-5 years to pay it off.
Personal line of credit. Lines of credit are a solid option if you have ongoing expenses that aren’t easy to predict. You get access to a credit limit to draw from whenever you need it, repaying what you borrow plus interest and fees. Rates are typically lower than a credit card.
Crowdfunding. If you have a sympathetic case and a healthy social media presence, a crowdfunding platform may be a way to raise funds for your legal defense, medical bills and more. Most platforms take a percentage of the money you raise as a fee.
Friends and family. It’s not always easy to ask for help, but you may be surprised by how much the people close to you want to help. You can even use online services to find legally binding contract templates that make it easy to outline loan terms that you and your loved ones can agree on.
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.
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Bottom line
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.
You often don’t have to pay back more than the amount settled. Your lawyer might also be able to negotiate lower rates and terms with the settlement loan company.
Like lottery winnings, the CRA does not consider settlements for non-pecuniary damages such as pain and suffering to be taxable income, so you get to keep this money tax free. Tax-free settlements also include money awarded for motor vehicle accidents, hospital fees, medication and other similar issues and expenses. These rules apply even for structured settlements in which you receive recurring payments over a period of time instead of in one single payout.
Talk with a tax expert to learn how taxes will apply to your specific case and circumstances.
Because of the relative newness of lawsuit loans, there are very few regulations set in place by federal and provincial governments. Perhaps the most concrete rule in existence so far is that lawsuit loan companies cannot charge you more than 60% interest on a loan.
Lawyers are under a general mandate to interact ethically with their clients, which presumably includes being fair in who they refer clients to for a settlement loan. Professional conduct rules enforced by some provincial law societies specifically state that lawyers may not act on clients’ behalves or lend money to clients if they, or anyone connected with them, has an interest that could affect that lawyer’s professional judgement.
Be sure to check with your attorney if you’re unsure of your province’s laws.
A structured settlement involves the plaintiff receiving their settlement in multiple payments over a fixed period of time or a lifetime, rather than as a lump sum. Structured settlements are common for personal injury cases.
Anna Serio is a lead editor at Finder, specializing in consumer and business financing. A trusted lending expert and former certified commercial loan officer, Anna's written and edited more than 1,000 articles on Finder to help Americans strengthen their financial literacy. Her expertise and analysis on personal, student, business and car loans has been featured in publications like Business Insider, CNBC and Nasdaq, and has appeared on NBC and KADN. Anna holds an MA in Middle Eastern studies from the American University of Beirut and a BA in Creative Writing from Macaulay Honors College at Hunter College, CUNY.
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