This week The New York Times had a front page story about the high interest paid by injured clients on loans and advances against their settlements.
Essentially, The Times’s angle was that the finance companies charge exorbitant interest rates and that there should be some regulation on this unregulated cottage industry.
Although we disagree about regulating this industry, we do agree that
- You should shop around for the best rate; and
- Before signing, carefully read the loan documents with your attorney, and be sure that you understand the full ramifications of the agreement.
Companies offer different rates. For example, one company that we have worked with offers a rate which get capped. After a certain period, such as 1 year, the client would pay back a maximum of 2.5 times the principal regardless of when the loan was repaid. The loan payback at 1.2 years or 3.1 years would be the same. In comparison, other companies have no cap on interest, and the interest can compound and grow like a cancer. The pay-back amount can exceed the entire the settlement. Some of these other companies even charge an application fee, and the fee is also subject to the limitless interest rate. Those companies were the focus of the article.
Review the agreement with your attorney, and make sure that you fully understand what you signing. You should understand that you are paying a high interest rate due to the speculative and unsecured nature of the loan.
Mark E. Seitelman, 1/21/11, www.seitelman.com.