Why a Settlement Loan Isn’t a Loan
You might have heard about settlement loans, a financial product designed to ease the financial burdens faced by personal injury clients and other plaintiffs waiting for a settlement. But the term “settlement loan” is a bit misleading, because this type of legal funding works very differently than conventional loans.
What exactly are settlement loans? Why do they have such a confusing name? And should you recommend these financial products for your clients?
Loans vs. Advances
First, you need to understand the differences between a loan and an advance. Both loans and advances are designed to give a borrower a sum of cash – but they’re paid back in different ways.
In a loan arrangement, an individual and a lender agree to an exchange; the lender provides the individual borrower with a mutually agreed-upon sum of capital upfront. In exchange, the borrower will pay back the loan according to agreed-upon terms. Often, this means paying back a minimum monthly amount, accruing interest along the way. Borrowers must qualify for a loan before getting approval, usually undergoing a review of their credit score, assets, and debt activity, among other factors. Additionally, if they fail to pay back the loan, they may be held liable in some way.
In an advance arrangement, a lender provides an individual borrower with a mutually agreed-upon sum of capital upfront, just like a loan. But there’s one key difference here; in an advance, the payback of the lent capital is contingent upon some expected income. For example, payday cash advances are usually contingent on a person’s next paycheck.
How Settlement Loans Differ From Traditional Loans
So how is a settlement loan different from a traditional loan?
There are several nuances to unpack here:
- Dependency on a settlement. First, settlement loans are dependent on the provision of a settlement. Your client won’t be taking out a loan with no assets or income to account for it. Instead, they’ll be taking out an advance, based on a predicted amount of money they’ll receive in the near future.
- Non-recourse. Most settlement loans are also considered non-recourse. In a traditional loan, if you fail to pay back the loan, the bank may be able to seize collateral to cover the costs; for example, if you fail to pay your mortgage, the bank may take your house. But in a non-recourse settlement loan, if your client doesn’t win a settlement, they won’t owe anything; none of their personal assets or other income are at stake.
- Fee structures. Traditional loans are usually associated with compounding interest rates, and sometimes other fees. But with a settlement loan from Capital Now Funding, the fee structure is simple and predictable; borrowers only owe the principal plus a fixed fee, based on the borrowed amount, with no recurring interest due and no other hidden fees.
- The application process. The application process for a settlement loan is usually simpler and more straightforward than for a conventional loan. Applicants need to provide a description of their case, their contact information, and their attorney’s contact information – but that’s about it. In conventional loans, it may be a requirement to provide in-depth financial details and run a credit report.
- Approval rates. Because settlement loans are provided based on real upcoming settlements, approval rates tend to be higher than with conventional loans. Settlement loan applicants aren’t turned away because of existing debt, low credit scores, or other factors that may otherwise hold them back from a conventional loan.
Why Call It a Loan?
If a settlement loan isn’t truly a loan, then why do so many people call it a loan?
One issue is the sheer number of terms ascribed to this financial product. Depending on who you ask, they might call it a settlement loan, a settlement advance, pre-settlement funding, or something else entirely.
Additionally, many lending institutions call it a “settlement loan” for the sake of simplicity. This is one of the easiest and most straightforward ways to describe the product, and it captures the gist of the concept behind the product. Just as importantly, it’s the type of term that a plaintiff seeking the product might search – so calling it a settlement loan makes it easier for people to find.
Should You Recommend Settlement Loans to Clients?
Is it a good idea for you to recommend settlement loans to your clients?
That depends on a handful of factors.
- Your client's situation. First, you need to understand your client’s situation. Not all plaintiffs will need a settlement loan, and many of them will want to avoid such a complication entirely. Clients who are out of work, those who don’t have much in terms of savings, and those struggling to make ends meet are ideal candidates for a settlement loan. If a client is still working and is relatively financially comfortable, they probably won’t need or want one.
- Your trust in a settlement loan provider. You also need to carefully evaluate your settlement loan provider, as not all settlement lenders act ethically. Good settlement lenders offer solid approval ratings, fast funding, and a fair, upfront pricing structure. Talk to different settlement loan providers to see how they operate and learn the benefits they can provide your clients. You should only refer settlement lenders if you have faith in their integrity and the quality of their services.
- What you stand to gain. What do you stand to gain from this recommendation? There’s a good chance your relationship with your client will improve as a result of your referral. You might also lower their stress, making it easier to cooperate and collaborate with them. In some situations, this could even buy you more time to negotiate – and push for a higher settlement amount.
So is a settlement loan the right move for your client? Now that you’re armed with more information, you’ll be in a better position to make a decision. If you want to know more about our application process, our terms and conditions, or if you just have questions about settlement loans in general, contact us today!