Why Shouldn’t I Borrow Money Against My Personal Injury Case: The Secrets that Legal Funding Companies Don’t Want You to Know
Victims of personal injury accidents in New York and the Bronx can, in many cases, find legal funding companies willing to loan them money against the future proceeds of their personal injury cases. While this service can provide short-term relief from some financial strains (e.g., credit card debt, unpaid medical bills), there are some issues that must be considered before obtaining this type of financing.
HOW DO THESE LOANS WORK?
When you apply for a loan against your personal injury case, what you are essentially doing is offering a legal funding company the opportunity to buy in to the potential proceeds of your case. The legal funding company gets a lien – a legal right to payment – against the proceeds of your case, but will get nothing (in most cases, anyway) if your case is not successful. In exchange for taking this risk, and as compensation for advancing you money before your case is paid out, the legal funding company charges interest, which stops running once your case settles or a verdict is actually paid out.
HIGH, COMPOUND INTEREST RATES
Loans made against the proceeds of your personal injury case often carry astronomical compound interest rates, which means that, as time goes on and interest accrues on your loan, the amount of interest gets added back into the outstanding loan amount and the periodic interest gets larger and larger over time. This means that you are paying interest on top of interest when you take out one of these loans.
If you take out one of these loans, the amount of money that ultimately ends up in your pocket after a verdict or settlement in your personal injury case can be drastically reduced because of high interest charges. Often, the amounts due at the end of a loan (i.e., when payment is made by defendants on a personal injury case) are over 200% of the initial amount of the loan (i.e., many borrowers who take out a loan of $10,000.00 end up with final loan balances, and liens against their cases, of $20,000.00 or more). This means that, if you take out a loan against your case, you might be reducing the in-pocket payout from your case by a sizable amount.
LITIGATION IS UNPREDICTABLE
The loans offered against your personal injury case by legal funding companies are not “term loans” wherein you know exactly for how long the loan will be outstanding and thus know exactly how much interest you will have to pay to satisfy the loan in total; these types of loans have no end date, and, becasue of this, the longer your case goes on, the more you will end up owing the funding company when your case is ultimately resolved.
When you are involved in litigation, many factors affect the length of time it takes to get to the end of a case. The defendants may make motions, appeal rulings, or even appeal the determinations of juries in an effort to delay or reduce their financial exposure. No matter the skill of a personal injury lawyer, they can never control everything in a litigation; this includes the amount of time it takes to make sure that you are awarded fair compensation. If you have a loan outstanding on the proceeds of your personal injury case, even routine delays can cost you money. This is dangerous, as your recovery can be significantly impeded and you may be pressured into making bad decisions because of fear of further interest payments.
IMPEDIMENT TO SETTLEMENT
When it comes time to settle your personal injury case, one thing that you will want to know is: How much money will end up in my pocket? If you took out a loan, this number will necessarily be smaller than it would have without the loan attached to the proceeds of your case. Clients are sometimes surprised by the amounts they owe and how much the rapidly accruing interest has depleted their settlement; they may push for more money in such cases, or try their hand at a jury verdict, which may not be advisable and ultimately can cost them their entire recovery. Sometimes, however, skilled attorneys can negotiate with loan companies to reduce the amount of interest owed on a loan if it will mean settling a case; but you cannot count on this being possible when you take out your loan in the first place.
HOW WE CAN HELP ALLEVIATE SOME OF THESE CONCERNS
In order to get the best advice as to how to handle issues relating to loans against your personal injury case, you need to speak with an attorney with the right tools and resources to help you make an informed decision. Call me at (718) 354-8000 to discuss your personal injury financing needs and questions today.
We have considerable experience setting up and negotiating loans on behalf of our family of clients.