Pre-settlement funding can be a lifesaver during a lawsuit, providing cash when you need it most. However, it’s crucial to remember that it isn’t free money – it comes at a cost. Understanding the long-term expense of taking an advance on your settlement will help you make informed decisions and avoid surprises later. By calculating the interest and fees you might owe, you can weigh the pros and cons and ensure that pre-settlement funding truly benefits you in the end.

Interest Rates: Simple vs. Compound

The interest rate is the biggest factor in the cost of pre-settlement funding. It’s typically quoted on a monthly basis. Many legal funding companies charge between 2% to 4% per month, though rates can vary based on your case’s risk. That might sound small, but remember it can equate to roughly 24% to 48% per year (or even more if interest is compounding).

Pre-settlement funding can use either simple interest or compound interest:

• Simple interest means you are charged interest only on the original amount funded. For example, if you borrow $10,000 at a 3% monthly simple interest rate and your case is resolved in 6 months, the interest would be about $1,800 (3% of 10,000 for 6 months). Your total repayment in that scenario would be roughly $11,800.

• Compound interest means interest accrues on both the principal and the accumulated interest over time. Using the same $10,000 at 3% per month but compounding monthly for 6 months, the total repayment would be closer to $11,950. It’s only a bit more in a 6-month period, but over a longer period compound interest can snowball significantly.

Key takeaway: Simple interest is generally cheaper over the long run, because you’re not paying interest on top of interest. With compound interest, the longer your case drags on, the more sharply your balance grows.

Fees and Other Charges to Watch For

Interest isn’t the only cost. Different funding companies may impose various fees that increase the effective cost of your advance:

• Origination or processing fees: A one-time fee for initiating the funding, sometimes taken out of the funded amount upfront.

• Underwriting or administrative fees: Charges for evaluating your case and managing the paperwork. These might be a flat amount or a percentage of the advance.
  Servicing fees: Some providers charge ongoing monthly service fees in addition to interest, though this is less common.

• Early repayment fees: While many companies allow you to pay back early (which can save you interest), a few might charge a penalty for early payoff. Always check if there’s any penalty for settling your case and repaying the advance sooner than expected.

All these fees can add up. For example, a company might approve you for $10,000 but charge a $500 processing fee. In that case, you’d actually receive $9,500 in hand but still owe interest as if you got the full $10,000. Always ask for a detailed breakdown of any fees before accepting a funding offer. Reputable lenders will be transparent about their fee structure.

The Impact of Case Length

The longer your case takes to resolve, the more interest will accrue overall. A lawsuit that settles in 6 months will cost you far less in funding charges than one that lasts 18 or 24 months. This effect is especially pronounced with compound interest, which can cause the amount owed to snowball. Be sure to understand whether your interest rate is fixed for the duration or might increase if your case goes on for a long time. If your case could be lengthy, ask if the funding provider offers a cap on the total repayment to prevent runaway costs.

Tips to Minimize the Long-Term Cost

While some costs are unavoidable, you do have control over a few things to keep your funding costs as low as possible:

• Borrow only what you truly need: The more you take, the more interest you’ll pay. Funding isn’t “free” money for splurges – treat it as a last resort for essential expenses. Taking a smaller advance will cost you less in the long run.

• Choose a company with simple interest and fair terms: Simple interest and a reasonable rate will save you money. Ask if the provider offers features like a cap on the maximum repayment to prevent runaway costs on long cases.

• Avoid multiple advances: Each time you take additional funding, you incur more fees and interest. Try to make do with one advance if possible, rather than coming back for a second or third unless absolutely needed.

• Compare offers: Different funding companies may offer different terms. One might have a lower rate or no fees. It’s okay to shop around and ask for quotes from a couple of reputable providers. Just be sure to compare the terms carefully – sometimes a lower advertised rate might include high fees, or vice versa.

• Have your attorney review the contract: Your lawyer can help spot if anything looks off, like a hidden fee or confusing language about rates. They have likely seen funding agreements before and can ensure you’re getting a fair deal.

By following these tips, you can reduce the overall cost of your pre-settlement funding and keep more of your settlement in your own pocket.

Conclusion

Pre-settlement funding can provide much-needed relief during a tough time, but it’s essential to go in with a clear understanding of the long-term costs. By calculating the interest and fees over the expected duration of your case, you’ll be prepared for the outcome and can make smarter decisions about if and when to use legal funding.

The good news is that not all funding is overly expensive. Instabridge, for example, offers simple interest, transparent fees, and even caps on costs to help plaintiffs avoid mounting debt. We believe in providing support that truly helps – not creating another burden.

If you’re considering pre-settlement funding and want to know exactly what to expect, reach out to Instabridge. Contact us today for a free consultation about your case and funding options. We’ll walk you through the numbers and provide a fair, upfront quote. With Instabridge, you can get the financial help you need now and peace of mind about the future repayment.