Wondering whether to turn to a traditional bank loan or explore pre-settlement funding? While both options can provide access to cash when you need it most, they’re not created equal, especially when your ability to work and earn income is limited.
For many plaintiffs, pre-settlement funding (sometimes referred to as pre-settlement legal funding or pre-settlement lawsuit funding) offers more flexibility and less risk than a typical loan. Learn about the key differences between the two to make the right choice for your situation.
What Is Pre-Settlement Funding?
Pre-settlement funding provides cash to plaintiffs involved in ongoing personal injury lawsuits. Unlike a traditional bank loan, this type of funding is based on the strength of your legal case rather than your income or employment history, for example. It’s designed to help cover essential expenses while you wait for your case to settle.
You typically need to meet the following criteria to qualify for pre-settlement funding:
- Have a pending personal injury lawsuit.
- Be represented by an attorney.
- Your injury was caused by someone else’s negligence.
- Reside in a state where pre-settlement funding is available and legal.
Types of Pre-Settlement Funding
Pre-settlement funding can apply to a wide range of personal injury cases. Whether you were injured in a car accident, involved in a slip and fall incident, or experienced another form of personal injury caused by someone else’s negligence, this kind of funding can help relieve financial pressure while your case is being resolved. Outside of a slip and fall or auto accident, other eligible types of cases may include medical malpractice, workplace injuries, construction negligence, and more.
What is a Traditional Bank Loan?
A traditional bank loan is typically a lump sum of money borrowed from a bank or credit union that must be repaid with interest over a set period of time. These loans are often used for large expenses like buying a car or paying medical bills. However, unlike pre-settlement funding, borrowers need to meet specific financial criteria under traditional loan requirements.
To apply for a traditional loan, you typically need to:
- Have a strong credit score and clean credit history
- Show proof of steady income or employment
- Provide bank statements, tax returns, and other financial documents
- Possibly offer collateral (especially for larger loans)
Terms of Bank Loans vs Pre-settlement Funding
From repayment structure to interest rates and risk, pre-settlement funding and traditional bank loans operate very differently. Understanding these differences can help you decide which option best fits your current situation.
Terms of a Traditional Bank Loan vs. Pre-Settlement Funding
The first thing to understand is that pre-settlement funding is generally not provided as a loan. In a limited number of states, litigation funders may issue a non-recourse loan, but in most states, pre-settlement funding is based on a purchase agreement. Rather than lending a consumer funds based on the strength of their legal claim, the funding company purchases a portion of the potential settlement or award.
Here’s how the most common terms apply differently to traditional bank loans and pre-settlement funding:
- Loan Amount – The total amount of money borrowed. This applies to both traditional bank loans and pre-settlement funding when given as a loan. In most cases, this concept is known as the Amount Funded in a typical pre-settlement funding agreement.
- Interest Rate – A fixed or variable rate charged on the borrowed amount. When given as a loan, pre-settlement funding typically charges a fixed rate. However, when offered via a Purchase Agreement, no interest is charged; rather a repayment schedule based on 6 month increments is established. In both instances, pre-settlement funding, whether done a loan or purchase agreement, offers a non-recourse structure.
- Loan Term – The set period over which repayment is required (such as 5, 15, or 30 years). This is standard for bank loans. While pre-settlement funding loan agreements may include some repayment terms, reputable funding companies will only require repayment if a settlement is reached. When provided via a Purchase Agreement, there is no term to the agreement – it is only paid once a settlement is reached.
- Repayment Schedule – Traditional bank loans involve structured payments (usually monthly). Pre-settlement funding has no set payment schedule, as repayment comes from your settlement, if one occurs.
- Collateral – Bank loans may require assets like a house or car to secure the loan. Pre-settlement funding does not require collateral; your legal case serves as the basis for the funding.
- Fees – Traditional bank loans may include origination fees, late penalties, or prepayment fees. Pre-settlement funding may include fees, but typically doesn’t penalize for early repayment.
- Default Terms – Terms that define what happens if the borrower fails to make payments. Bank loans have strict default clauses. Pre-settlement funding is non-recourse, so there’s no repayment required if you lose your case.
- Loan Purpose – Traditional bank loans may have restrictions on how the money can be used. Pre-settlement funding is typically flexible and can be used for nearly all living expenses. The only restriction is on the use of pre-settlement fund for legal expenses.
- Required Documentation – Banks often require proof of income, credit history, and more. Pre-settlement funding is based on the strength of your case, not your financial background.
