In the last article, we examined the historical pricing models in the lawsuit cash advance funding industry. We also discussed the business dynamics that often change pricing in any business which puts capital at risk for profit. Specifically, we mentioned how the settlement loan industry evolved from an enterprise charging as much as 10% per month as “interest” on lawsuit cash advances to a business where applicants are routinely “funded” for as little as 15% per six month period.
In this entry, we examine the costs associated with lawsuit funding and analyze them from the perspective of an applicant who is in dire need of cash for whatever reason. From this angle, we can more accurately assess the costs associated with this type of financial relief – only available for those who have a pending lawsuit.
Since every person’s circumstances are different, weighing the costs in obtaining a lawsuit loan or pre-settlement funding against the future proceeds of an individual’s pending case, can only be accomplished on a case by case basis. For this reason, perhaps the best way to illustrate the point, is to use a hypothetical example.
Lawsuit Funding Costs – Hypothetical Example
A 36 year old plaintiff in a lawsuit finds himself unable to work and support himself and his family due to injuries sustained due to the negligent driving of another individual. Since 2008, plaintiff has exhausted all other avenues for financial relief. He has borrowed money from his friends and family. He has taken a home equity loan against the value of his home. He has gone through his disability payments from work and the other “benefits” he receives do not cover his monthly expenses. He is currently 5 months in arrears on his mortgage and property tax payments.
Forced with an imminent foreclosure proceeding, this plaintiff’s options are limited. On the one hand, he can file bankruptcy, which could save his home but would ruin his credit rating for many years. He can hire an attorney for this but the attorney requires payment up front for his time and expertise.
Another option is to obtain lawsuit funding to help with his liquidity issues. Let us briefly delve a little deeper in the analysis.
We already discussed the costs associated with lawsuit cash advances. But what about the cost of not being able to pay bills on time, or at all? We may not be able to quantify the costs exactly, but we can at least identify some potential problems. For example, defaulting on a mortgage could result in the following “costs” for the homeowner.
1. Removal from the Dwelling. The defaulting party must then find shelter. Normally, a rental unit requires first and last month rent plus a security deposit. That is three months rent up front from the new tenant. Of course, if the person has three months rent, he would probably be able to at least delay the foreclosure process. So there is a liquidity problem on top of the existing problem. One can easily foresee multiple “costs” associated with being removed from a place of residence (e.g. moving costs, additional fuel expenditures, storage fees, etc.).
2. Destroyed Credit Scores. Like it or not, this country operates on debt. Who is indebted to whom is the oldest and arguably the most profitable game in history. Access to credit is an integral part of the game and are a function of credit scores. Obviously, a mortgage foreclosure would severely hamper a person’s access to credit for car loans, future home purchases, appliances or even credit cards. Further, even if credit is offered, the interest rates charged will be far more than otherwise would be required. Above are simply two “costs” facing the person in our example.
When thinking about the above, it is helpful to weigh the long term effects of these events. The real problem is how to accurately assess the cost and compare them to obtaining a lawsuit cash advance funding against a case. Ultimately, the analysis depends on individual circumstances. Fortunately, the lawsuit funding business exists for those persons who make the analysis and choose lawsuit loans as a possible solution. Thousands of people make this choice each and every day. Thank you for your interest in the pre-settlement loan business.