4 Reasons Lawsuit Loans Are a Bad Idea

Lawsuit loans are structured as cash advances on an anticipated payment after the lawsuit is complete. They typically occur only in civil cases when the plaintiff is expecting a large settlement but cannot fund the legal fees needed to secure that settlement. While this may sound like a simple solution to a complicated problem, it is actually a very complicated and risky solution.

#1 High Risks

There is no guaranty you will win your lawsuit. Even if you do, there is no guaranty you will get the payment amount you were seeking. Typically, the loans are structured so you are excused of the debt if you fail to receive the payment you expected. Traditional, low-risk lenders do not extend lawsuit loans because they are aware of the potential for disaster of this type of contract. The types of lenders that work with loans for lawsuits are high-risk lenders, such as online lenders or cash advance lenders. These businesses, though they are engaging in a legitimate and legal business model, at times have lower ethics and standards than traditional lenders. You should be wary of the potential for predatory lending and loan scams from high-risk lenders.

#2 High Costs

To compensate for risks with lawsuit loans, a lender will charge a very high interest rate. Since these lenders know you do not have many options for your lawsuit loan, they are not concerned about scaring you away with high prices. You sign the contract at no payments and no interest initially, agreeing to repay the debt later. After you have made your settlement and begin to repay your legal fees, you will find a large chunk of your settlement never reaches your bank account. The lenders are essentially a third party in your lawsuit, and they are awaiting the settlement with as much anticipation as you are. 

#3 High Stress

Because of the high risk and high cost of financing your lawsuit, you will be on high alert throughout the civil proceeding. You have a lot riding on your ability to successfully gain a settlement. When you are going through a lawsuit, you will already feel stressed and anxious. Knowing you owe a lender does not help the situation. This anxiety can lead you to make decisions you would not otherwise find advisable, such as settling for a sum you feel is not appropriate or even turning down a settlement you find attractive.

#4 Damaging to Credit

Anytime you take a loan, it will appear on your credit report. If you repay the loan, your credit will typically respond in a positive manner. Unfortunately, there are some loans that may actually do the opposite for your score even if paid off successfully. Lawsuit loans, which are like cash advances in the eyes of the credit bureaus, can actually damage your credit score even if you pay the loan off on schedule. When you take a loan from a high-risk lender, you are indicating that other options were not available to you. This can show you have a lack of savings to protect you in the face of a future emergency.

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