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Simple v Compounding Rates in Lawsuit Funding

Simple v Compounding Rates in Lawsuit Funding
 
The rate lawsuit funding companies charge varies widely, but many charge roughly 36% a year.  These rates apply to pre-settlement funding. 
 
Some companies charge compounding rates while others charge simple rates.  The difference between these two types of rates is important to understand when choosing which lawsuit funding company to use. 
 
A compounding rate means you are charged on the borrowed principal and the accumulating interest.  A simple rate is charged only the borrowed principal.  A company may advertise a lower, teaser rate up front, but you end up paying more because the rate compounds.  The effect of compounding is greater when the amount of the loan is greater and the duration is longer.  Typically lawsuits take longer than expected to settle and having to pay a compounding rate could reduce your settlement dramatically.       
The following chart gives an idea of what interest rates are typically paid in lawsuit funding. 
 
Lawsuit Funding Rate Example
Fees owed on a $10,000 advance with rates of 3% a month. 
 
Compound Interest
Simple Interest
Period
Fees Owed
Period
Fees Owed
Monthly
3%
Monthly
3%
6 Months
$1,941
6 Months
$1,800
12 Months
$4,258
12 Months
$3,600
18 Months
$7,024
18 Months
$5,400
24 Months
$10,328
24 Months
$7,200
36 Months
$18,983
36 Months
$10,800
 
*This chart is for illustrative purposes only and does not represent an offer for a loan at these specific rates or dollar amounts.
 
What we learn from this chart
 
As you can tell from the chart, the more often the rate is compounded, the more you end up paying when your case is resolved.   When you pay compounding rates vs a simple rate you pay a higher annual percentage rate (APR).  APR is something important to consider when most lawsuit loans are paid back when the case is settled, which could take years.  If a lawsuit loan company is charging compound interest then the APR is going to be higher than the quoted interest rate.  If a lawsuit loan company is charging simple interest then the APR is equal to the interest rate. 
 
Why the high rates for lawsuit funding?
 
You may be scratching your head at this point wondering why the rate is higher than your mortgage, car loan, student debt and even your credit card.  The first reason is that a lawsuit loan is not actually a loan.  It is a cash advance backed by the value of your lawsuit, which is a much riskier asset class than financing a home, car, or purchases through a credit card. 
 
A mortgage is backed by a hard asset, a house, which can be sold if the loan is defaulted on.  The same fact is true for a car, which can be repossessed by the bank if the owner stops paying.  Student loans are the most collectable type of debt, which don’t even go away after declaring bankruptcy.  Student loans and credit cards are issued with the promise to pay off the balance with the income you earn at a later date. 
 
Lawsuit loans are a completely different type of asset.  No matter how good of a case you think you have, lawsuits are not a sure thing.  A certain percentage of cases that are funded are bound to go to trial and lose.  While you may have significant personal injuries and require damages to be paid, you can’t get blood from a stone.  Meaning that if you sue a person and they don’t have that much insurance or they don’t have many assets then you’re on the hook for your medical bills and missed time from work.  If a funding company loans you more than they should have without doing their homework they will only collect a portion of what they are owed. 
 
Lawsuit loan companies aren’t paid back for a number of other reasons aside from a case losing at trial.  They include fraud by the client, attorney, and paralegal.  A plaintiff may be fired by their attorney or vice versa.  A plaintiff may pass away, go missing, or a pre-existing medical condition could cause the value of the case to be reduced.  These happenings are unpredictable when the case is first funded and are a cost of doing business, which are factored into the rate you pay. 
 
The money that funding companies use typically comes from investors.  These investors require a certain rate of return for putting up their money.  Due to the risky nature of the asset class of legal funding, investors require a high premium over the risk free rate of return.  A rule of thumb in finance is the higher the risk the higher the interest rate.  If the risk wasn’t real then competitors would come in seeking high returns would drive down interest rates. 
 
Lawsuit loans are a non-recourse form of funding.  This means that if you lose at trial you don’t owe the funding company any money.  Applying for an advance does not require a credit check, and the inability to pay back the advance does not affect your credit.  The advance amount is solely dependent upon the amount the value of your case. 
 
Our advice to you
 
Lawsuit funding can be expensive.  We suggest than you exhaust all other options before taking an advance.  If you’ve been in a personal injury accident and you need cash to get you by in the short-term look for other options first.  Borrow from your credit card, your family and friends before thinking about taking an advance.  Any lawsuit funding company that says otherwise is not acting in your best interest due to their incentive caused bias.  If and when you do decide to take an advance take as little as you need.  The less money you take the less you will owe when your case is resolved.  If you need more money you can always call the lawsuit loan company back for a second advance.   If you need more money and the lawsuit loan company you’ve been working with refuses a second advance try calling a different company that is more aggressive with lending.    
 
Bridgeway Legal Funding
 
At Bridgeway Legal Funding we offer both simple and compounding rates depending upon the risk and uncertainty of your case. We offer clients as little as possible to reduce our risk and maximize their settlement amount.  We are honest and transparent with our customers. To apply for an advance or to find out more call 800-531-4066. 

 

 

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