The lure of a settlement loan is clear: upfront money. The interest rate for settlement loans? Imagine the interest rate that Gazzo (Rocky Balboa’s loan shark boss in Rocky I) must have charged. Then double it. Even the lowest rate lawsuit loans that our lawyers have seen are still unbelievably high.
How the Loan Companies Charge So Much
How do they get around Maryland usury laws that say you can’t take advantage of other people? How are these settlement loans not a dictionary definition of predatory lending? The backdoor is that the outcome of a car accident claim or a lawsuit is theoretically uncertain.
Yet our firm has many auto accident claims where I could show up for trial drunker than Otis from Mayberry and still get money damages from the jury. Every single time. So getting enough to pay back the principal of the loan is fairly certain. Yet the theoretical uncertainty allows most settlement loan providers to charge whatever they want.
Vulnerable accident victims ignore how much money they will owe tomorrow because they are focused on the lure of cash today. Our lawyers discourage our clients from taking these loans. Interestingly, National Lawsuit Funding provides on its website (2021 update: since taken down) that I think takes a logical view of these loans.
Before I get angry emails, note that I don’t think every lawsuit loan company charges usury rates and never performs a necessary function for some accident victims. [Update: I got a call, but not that angry.] But I am saying most do. I got a settlement loan repayment plan that I just received yesterday from a wonderful client who really has no choice but to get advance funding (which precipitated this blog post/rant). It underscored for me once again the insanity of the terms of some personal injury lawsuit loan agreements.
What to Look Out For When Getting an Injury Settlement Loan
If you need to get an injury settlement loan, you are going to first need to get the cooperation of your lawyer. We don’t like it when our clients get loans. But our clients are adults and when they need a loan, we help guide them on a path where at least they are ripped off as little as possible. The big trick with these loans is the fees. The interest rate does not sound as preposterous as the effective rate of the interest because there are so many somewhat hidden fees. Here is what we cannot dispute: I would own a baseball team if I started one of these companies. Recession-proof business with virtually guaranteed returns.
What to Do If You Have No Choice
If you have no choice but to take out a settlement loan, first really question the premise. Are you sure that you want there is NO OTHER WAY than litigation funding? If there really is no credit card, no friend, no options, just call at least 5 different companies and have them send you the paperwork. Read it carefully or make sure your lawyer does. Sometimes, focusing on the interest rate is a mistake because it is all the random fees that get you. Find the lowest effective rate and run with that one.
What Is the Maximum Interest Rate for a Loan in Maryland?
The maximum interest rate allowed by law is 33% for some small loans. For loans over $2,000, the cap is an interest rate of 24%. But Maryland usury laws exclude settlement loans because there is a possibility that there will be no payback because the settlement or verdict is less than the loan amount (minus attorneys’ fees).
One Final Problem: Discoverability
In Miller UK Ltd. v. Caterpillar, Inc., two commercial defendants faced off over something about the misappropriation of trade secrets. The plaintiff got litigation funding. The defendant demanded discovery on the documents provided to the third-party funders. The plaintiff objected, arguing the attorney-client privilege and the work product doctrine. But the court found that documents like this sent to a third party are not protected.
Now we have put nothing in one of those applications we feared would harm us if discovered. But it does not give you a warm fuzzy feeling to give defendants those documents.