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The Difference between Payday Loans and Lawsuit Loans

Have you been injured in an accident and are struggling to pay your bills?  There are a lot of options to borrow money.  You can borrow from friends and family, a credit card, or a bank, but when those options are not available where can you turn?  Some last resort options are payday loans or lawsuit loans.

Payday Loans

Lawsuit Loans

Need to pay back no matter what
Non-recourse - only need to pay back 
if your case settles
Much higher cost
Lower cost
Need a paycheck
No paycheck required
Need to pay back in your next check
No payments until case is settled
Can only borrow up to a few hundred dollars
Can borrow up to $50,000 depending on the value of the case

Payday loans are most commonly taken out by people living paycheck to paycheck.  In between paychecks you may run out of money and need to borrow let’s say $300 to get you by until your next paycheck.  The amount you pay back could be as low as $375 or as high as $750 depending on which loan company you use and how fast you pay it back.  If you pay it back right away with your next paycheck you will pay less, but if you neglect it and the loan rolls over you will continue to incur fees. 

The payday loan industry is highly regulated and scrutinized by state and federal government agencies.  In many states you cannot borrow from a payday loan lender at all.  You are also limited to the amount you can borrow.  In most states you are limited to a few hundred dollars and some states allow up to a thousand dollars.  An example of how the government has cracked down on predatory lenders is shown in the recent Netflix Original Documentary titled “Dirty Money.” 

The application for a payday loan makes it easy to get and you can usually get the money within one business day.  You must have some sort of income to receive a payday loan, whether it be a job, social security, disability insurance or a structured settlement.  If you’re considering taking a payday loan make sure you understand the terms of the loan before you agree. 

Lawsuit loans are quite different from payday loans.  The term “lawsuit loans” can be misleading, since a “lawsuit loan” is not a loan at all, but rather an investment in your case.  If the outcome of your case is unsuccessful then you aren’t on the hook to pay the money back.  There are no payments required until settlement.  The correct terminology is a pre-settlement advance, however it is often dubbed a “lawsuit loan” by consumers. 

In order to borrow money against a lawsuit you need the following:

  • a pending or settled lawsuit
  • hired an attorney to pursue your case 
  • documentation showing what happened whether it be a police report, incident report or eyewitness testimony
  • treatment for your injuries from the accident 
  • another party is at fault
  • insurance coverage adequate to cover your damages

Borrowing against a lawsuit is much cheaper than a payday loan.  Typical rates on the money you borrow against a lawsuit are several times lower than rates for a payday loan.  Annual Percentage Rates (APR) of payday loans are typically in the 300-700% range.  If you are looking to borrow against your lawsuit make sure to ask the company how much they charge and how much you will owe back over time.  The amount you have to pay back will depend on the length of your case.  While you will owe more the longer your case goes, the longer your case takes to settle, typically the more valuable it becomes. 

The legal funding industry is not as regulated by government agencies as the payday loan industry.  However, the legal funding industry is self-regulated.  The American Legal Finance Association (ALFA) is a trade association that represents the leading consumer legal funding companies across the country.  They have established fair, ethical and transparent funding standards within the industry. 

There are also a lot of competitors in the legal funding industry, which has forced rates lower and made borrowers better off.  However, in a few states you cannot borrow at all while others put limits on how much lenders can charge.  The minimum you must borrow against your case is $500-$1000 for most companies.  There is no limit to the amount of money you can borrow against your case as long as your case warrants it and the funding company agrees.  However, most companies will not give more than 10% of what they think your case is worth.  For example if the underwriters determine that your case is worth $50,000, they will limit you to a $5,000 advance. 

An application for legal funding is quick as long as the Attorney representing you is quick in providing documentation on your case.  In most cases you can have your cash within a day or two from the time of application.  You do not need a stream of income to apply since the repayment is based solely upon the settlement of your lawsuit rather than your paycheck. 

If you’ve been injured in an accident and are behind on your bills consider the benefits of a lawsuit loan over a payday loan. 

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