If you watch TV during the day, you'll probably see one of the many advertisements for companies that will loan you money against your personal injury case. Should you take this loan?
I always advise my clients that before they get a loan from one of these funding companies, that they first try to get a loan from a regular bank or a family member. Oftentimes people will not have a good enough credit score to get a loan from a bank. Borrowing money from family members can also be difficult. So, clients will sometimes be left with no choice.
It is very important for the client to understand that when they borrow against their case, they are technically getting part of their settlement in advance of the actual settlement. The funding companies are ADVANCING part of the settlement.
The upside to borrowing against a personal injury case is that the loan is only against the case. If you lose the case, you don't have to pay the loan back. This is very different than a regular loan. If you borrow $1,000 from Bank of America (or any other bank), they're going to want their loan repaid whether you lose your case or lose your job or get sick, etc. A loan against your personal injury case is only against your case and only if you win.
Because funding companies don't get paid if the client loses their case, they are cautious about what cases they will loan against. They won't loan to cases that they don't think they'll win (funding companies will often want to see a copy of the police report and medical reports). Also, they are cautious about how much they will let you borrow. If the funding company thinks your case is worth $50,000, they'll usually only let you borrow 10% of that.
The downside of these loans is that they are expensive. Very expensive. Today, April 14, 2021, if you were to get a mortgage, you could get a rate below 3%. Many of these funding companies charge ten times (10x) as much! This interest can add up and eat up a lot of the settlement when it comes time to settle the case.
Very often, a client will be going through some difficult time (loss of a job, car being repossessed, etc.) and they desperately need the loan. They get the loan and are happy. Then time passes and they get their medical treatment for the accident, and the case gets litigated. When the settlement offer comes in, and they see how much they have to pay the funding company, three things happen. First, they are shocked by how much they have to repay the funding company for the loan. Second, they have forgotten how helpful the loan was and how much they needed it when they got it. Third, they forgot that the loan was actual an advance of part of their settlement.
Clients have to think very carefully about getting these loans. They can be helpful when you get the money, but painful when you have to pay it back.