So-called “loans” or “advances” carry very high interest.
It is not unusual for a litigation finance firm to charge more than 30% per year plus application costs! Some companies cap the pay-back, such as 2.5 times the amount loaned.
Here are the reasons for the high interest:
- The funds are not actually a loan, but a purchase of part of the settlement. Therefore, the laws of usury do not apply. See Part I.
- The “loan” is a “non-recourse” obligation in that it is payable only out of a net settlement. In other words, if the client recovers no money, the “loan” does not have to be repaid.
- The “lender” is taking a gamble on losing his principal and interest if the case is lost.
Since these “loans” carry huge interest, we encourage clients to seek these loans only as a last resort where other funding sources are unavailable, such as credit cards, and loans from family and friends. Furthermore, these funds should be used only for basic living expenses or medical expenses.
If you have a question about funding, call your attorney.
Mark E. Seitelman, 11/22/10, www.seitelman.com.