Why Are Settlement Loans Better Than Bank Loans?
Some lawyers are turned off of the idea of recommending “settlement loans” to their clients because they know that excessive loans can be dangerous to a person’s bottom-line financial situation. And it’s definitely true that excessive loans and excessive debt can financially cripple an individual, even if they started in a great financial position.
But settlement loans aren’t the same as bank loans, and when it comes to a loan against a lawsuit, settlement loans are far better than bank loans. Let’s explore the differences and explain why settlement loans are so beneficial.
How a Settlement Loan Works
Settlement loans work in a simple, straightforward way.
Your client, a plaintiff in a pending case, is likely to receive a settlement. But they might have to wait weeks, or even months, to receive that money, and their expenses are already piling up. Through a settlement loan, they’ll be able to get instant access to a portion of the capital they expect to receive as part of the settlement. Once received, they can use this money for anything they want, and they won’t owe anything until the settlement arrives.
When they receive the actual settlement, they’ll be responsible for paying back the settlement loan. Typically, they’ll also be charged a fee or an interest rate on the principal. If the client doesn’t win a settlement, they owe nothing.
Differences Between Settlement Loans and Bank Loans
So why is a settlement loan better than a bank loan?
Let’s find out:
- The application process. You can see for yourself if you’re curious, but the application for a settlement loan is usually short and sweet; by contrast, applying for a bank loan can be an exhausting and complicated process. Your clients will only need to provide a few pieces of information, including their name, their contact information, and some information about the case. The application can be completed in a matter of minutes.
- Credit requirements. To be approved for a significant bank loan, most borrowers will need to have a strong credit score in place. You need a lengthy history of making payments on time – and minimal standing debt. However, a settlement loan is typically secured by a settlement, meaning the borrower’s credit history has little impact on their ability to pay back this loan eventually. Accordingly, most settlement lenders don’t care about a borrower’s credit score and will make no effort to pull a credit report.
- Due diligence and approval. The settlement lender usually talks to the lawyer representing the case to verify the details of the case as a form of due diligence. If the case details are sufficient and a settlement seems promising, the settlement loan will likely be approved – regardless of other financial factors in a borrower’s life. By contrast, bank lenders typically investigate a borrower’s financial history thoroughly, studying their income, employment, current assets, current debts, existing lines of credit and liabilities, and countless other factors. Approval can take weeks, if it comes at all.
- Terms and conditions. Depending on the type of bank loan you get, the terms and conditions may be short and simple or long and exhaustive. Borrowers are sometimes forced to read through pages and pages of details, full of terminology they may not understand. But in a settlement loan, the terms and conditions are clear and straightforward. Even a layperson can understand them in just a few minutes of conversation or light reading.
- Interest rates vs. fixed fees. It’s true that some settlement lenders charge an interest rate on the borrowed principal, just like a conventional bank loan. But if you choose the right provider, like Capital Now Funding, you will only have to pay back a fixed fee and zero-recurring interest will be charged on your loan. Lenders recognize that interest rates can compound over time, eventually putting borrowers in a much worse financial position than when they started. Fixed fees are simpler, easier to explain, and are less likely to result in financial distress, so they’re a better fit for settlement loans overall. With a fixed fee, you’ll know exactly what you’ll owe, long before you take out the loan itself.
- Recourse vs. non-recourse. In most cases, settlement loans are non-recourse. That means the borrower will not be responsible for paying the loan back if the settlement is not received. In a worst-case scenario, where your client doesn’t receive a cent, they won’t be held responsible for the money they initially borrowed. Compare that to a bank loan, where the bank may attempt to seize personal assets (including the borrower’s home) to secure repayment.
- Communication and customer service. Some banks do a great job of providing customer service and explaining the terms and conditions of their loans thoroughly. Others provide far less assistance. In the realm of settlement loans, it’s also a mixed bag – but many settlement lenders are eager to spell out the terms to borrowers and lawyers so they can see how simple and streamlined the process truly is.
- Personal needs. Bank loans are often used to finance businesses, help consumers buy homes, or fund major purchases. But most people seeking settlement loans need the money for groceries, housing expenses, and to pay off hospital bills. There’s more of a pressing personal need for settlement loan money.
Are Settlement Loans Without Risk?
Does that mean settlement loans are completely without risk? Definitely not. The nature of your settlement loan will depend heavily on your lender; some settlement lenders are borderline predatory, charging high interest rates and intentionally obfuscating their terms. Others are much more transparent, open, and interested in operating in borrowers’ best interests. While most modern settlement lenders offer small, fixed fees and non-recourse loans, some others still charge aggressive interest rates and have other strict terms. Additionally, even the best settlement loan’s financial value can be compromised if your client is totally irresponsible with the money.
Settlement loans aren’t a gift to your clients and there are some complexities to navigate, but with the right partner, you can rest assured that your clients will get a much better experience than they’d get taking out a conventional bank loan. At Capital Now Funding, we work hard to make sure your clients get the capital they need while waiting for their case to settle. Contact us today for more information or to get started with your client!