Lawsuit Loan Rates
LawLeaf continues to inform our clients on the various aspects of the lawsuit funding industry. One of the areas within the industry that is not very transparent is the lawsuit loan rates. In this F.A.Q we will attempt to provide you with information on how rates are derived and how much it may cost you to obtain a lawsuit cash advance against your case.
What is a lawsuit loan?
By definition a lawsuit loan is a financial instrument that is provided by a lender to a borrower. The borrower is the party that is bringing legal action against the defense. This legal action may be a personal injury or commercial litigation claim or lawsuit. A lender will provide lawsuit funding against the initial claim or the actual lawsuit. A lender may also provide a lawsuit loan against a case that is already settled. A lawsuit loan is a non recourse or contingency fee based loan that is always based upon the outcome of a case.
Do I need a lawyer to obtain a lawsuit loan against my personal injury case?
Yes. The attorney will need to sign off on the contract. The contract will serve as the lien on the case. This lien is used to assure if and when the case is settled or won, the lender receives their money. This instrument can only be used by those individuals that have legal representation.
Do all companies charge the same amount?
Lawsuit loan rates may be different for each company. Lawsuit loans do not currently fall under state usury laws because they are non recourse. This means a company is free to charge what they believe is fair for the customer and their investors. If a company has access to “cheaper” money their rates may be lower. For instance if a company has a pull of private investors that agree on an expected rate of return their rates may be a little lower compared to a company that is funded by an angel investor. This is because angel investing comes at a higher rate and in order to make a profit a company will be forced to charge a higher rate.
Personal Injury Rate Tables
There are several different rate tables and each company may use a variation of the different tables. The one thing that is always consistent regardless of how the rates are compiled is how a case is funded. Lawsuit loans are generally based upon the likelihood of the case. If the applicant has a great case the rates tend to be less. If the client has already reached a settlement and waiting for a check, the rates should be at their lowest. The amount of money that you will pay back is typically determined by the amount of time it takes to resolve the case and the rate at which the money was lent.
Monthly Compounded Rates
A monthly compounded rate is the most popular rate schedule. If a client is close to reaching a settlement a monthly compound may be the most affordable for the client. The payback is generally lower on the front-end however if the case extends out over a year, a compounded rate is generally higher on the back end.
A flat rate is easier to understand. A flat rate is generally higher on the front-end and lower on the back-end. Flat rates may also increase over a quarterly or bi-yearly basis.
Compounded vs. Flat
The average rate for a pending personal injury case is around 2.5%- 3.5% compounded monthly. If a case is settled and paid within 4 months the rate which is charged is generally around 12.5%-13.5%. The average rate for a flat fee is around 15%-18% every 6 months. If the case settles within the 4 months you are paying the 15%-18% percent regardless. As you can see by this example the monthly compound for cases that settle faster are more affordable. If the same applicant at the same rates were to reach closure in 12 months the rates for the flat fee basis would be lower than the compounded formula. In most flat fee contracts the lender will double down after 6 months and 1 day. This means their rates will jump up from 15%-18% to 30%-36% if closed after 6 months and 1 day. After a year they may elect to charge an additional 15%-18% for the following 6 months.
Depending upon when the case will settle will ultimately determine which rate schedule is best suited for you.
Monthly – The client will agree to pay the ongoing compounded rate until the case settles.
Flat Fee (6 month increase) – The applicant will agree to a rate increase for every 6 months the loan is unpaid.
Complex Commercial Dispute Rates
There are some funding companies that provide legal funding against complex commercial disputes. These disputes are generally intellectual property lawsuits. Commercial cases tend to be more complex and take more time. A lender may loan money for a variety of different reasons. Unlike personal injury in which a lender will only provide lawsuit loans for out of pocket expenses such as medical and living expenses, a commercial litigation financier may provide funds for court costs and legal fees. The rates on these types of cases (depending upon the size of the suits) are much different. These lawsuits are generally in the tens of millions of dollars.
If an applicant borrows several million dollars on their case they will agree to pay back the money as a times factor. These factors are generally 1x, 2x, 3x what is borrowed. These rates are not compounded it should never increase. If a client borrows $3 million at a times factor of 1, they will agree to pay back the investment plus an additional $3 million from their proceeds.
Percentage of the Case
The percentage of a case is based upon the recovery. If the client agrees to borrow for case costs some lenders will insist they must pay back the amount loaned plus a kicker. The kicker is a percentage of the overall case. For instance if a client borrowed $5 million dollars at a 10% recovery and the client received $100 million dollars from the settlement, they would agree to pay back $15 million dollars to the lender.
We understand that this may be confusing for some people and we are here to answer questions regarding your case. It is important before you enter into a lawsuit loan contract that you have some understanding of how these rates are calculated and at what rate you will be charged. When you begin consulting with a company you should provide the accurate expectations on when you think your case will settle. This will help the company determine which rate schedule is best suited for your case.
If you are interested in learning more about a lawsuit loan or have questions regarding potential rates on a funding request, contact us today.