You may have seen ads on TV offering to give you a loan against the outcome of your auto accident injury case. “Why wait?” the ad suggests, “it’s your settlement money, use it now!” While quick money may seem like a good idea at the time, there are many reasons that you should only use these companies as a last resort.
In fact, if you give us a call and ask us this question, we will probably attempt to talk you out of engaging with loan companies during your case.
Why? There are multiple reasons.
To give a brief overview, we had a client whose case was almost done, they were out of medical care, and a demand package was already sent to the insurance company. At that point, it was only a matter of weeks before the case was going to get an initial settlement offer because medical care and liability were not in question. This case was in the category of cases that we assume are going to settle without our having to file a lawsuit.
We found out that our client had gone out to one of those loan companies you see on T.V. who advertise, “you have an injury and you need cash now, call us!” Our client had gotten a loan quote from the company and was looking to take out $2,500 that day. The agreement was that our client would pay the company back after the case settled. This type of transaction is called a non-recourse loan.
What is a Non-Recourse Loan?
A non-recourse loan is a loan that is given out and does not have to be returned unless you win your case.
Basically, the loan company will tell you, “if you do not get any money from your case, then you do not have to pay us back.” Sounds like a great deal, right? Unfortunately, it is not.
Let’s be real. These companies would not be able to operate if they were just handing out money to everyone regardless of the case’s outcome. They would never make a profit! If you are going to work with these types of companies, you need to be aware of their vetting process.
What is the Loan Process?
The process can become very confusing to someone who walks into this situation with no prior knowledge. That’s okay, they make it confusing on purpose to prey on the unsuspecting individual who needs quick cash in dire situations.
Let’s break the process down.
When you call one of these loan companies, the first thing they will do is get a statement from you. Next, they will call your lawyer to further confirm that the case will indeed settle with money in your pocket.
In a larger loan amount, they are going to ask for other documents like police reports, certificates of insurance coverage, and medical bills to justify the amount of money that they are giving to you.
These loans are always a bad bet and in our client’s situation, it was a really bad bet.
In this case, our client was asking for a $2,500 loan. We found that the agreement stated that our client would be required to pay $3,000 dollars back to the company the day after the $2,500 loan was received. Of course, the lending company had not taken the time to explain this to him.
So, no matter how you cut it, our client had already lost $500 in this transaction.
Now, here is when it starts to get even more ridiculous.
To obtain the loan, our client also had to pay the company processing fees. Our client had three price options for delivery:
- $20 for a check
- $99 for an overnight check
- $200 for a cash wire
Keep in mind, these companies are almost always going to push you to get the money immediately.
In the end, our client was technically receiving $2,300 which means they had already lost $700 in this transaction, Crazy right?
This is an AWFUL deal if that has not already been made obvious to you.
How Do Loan Companies Get Away With This Practice?
Now, some may ask, “how are these companies able to get away with this operation?”
The answer to that question is that non-recourse loans are not technically loans. State usury laws, which cap the amount of interest that can lawfully be charged on a loan, do not apply.
These loan companies can get around interest laws because the loans are classified as non-recourse loans. They are not actually loans because they are credits against the settlement and since it is not considered a loan transaction, there are no caps on the interest rates.
So, in our client’s unfortunate situation, even if they paid back the loan the very next day, they would be required to pay back $3,000.
It didn’t stop there… The amount owed begins to increase after that one-day cut-off.
For example, if our client returned the money in:
- Four months: they would owe $3,125
- Six months: they would owe $3,700
- More than a year: they would owe $5,000
In case you were not already happy about your loss of $700, there were still even more additional fees to know about.
There was a $60 document management fee and $35 fee every six months because the $1,200 of interest every six months was not already enough money for them. ALSO, if you want additional funding, they will happily review your file again for an another $20.
You really have to ask yourself if any of this is even worth the hassle.
What we tell clients is, “you are an adult and very capable of making your own financial decisions, but please let us walk you through your options to help you understand just how bad of a deal it really is.”
What we learned from this client was they had no idea what they were expected to pay back. Not one person from the loan company discussed anything with our client about the interest rates or additional fees and rules. They just told our client, “hey, we can get you the money now, just pay us back when the case settles.”
Our client did not know what to ask going into negotiations with this financial loan company, and consulting with us beforehand probably would have helped put them in a better situation.
Our experience is that these loan companies always make the cases a lot harder to settle because what seems like a good deal today potentially becomes an extra $5,000 bill later. This is just another bill we must deal with at the end of the case.
If you are thinking of taking out a loan against a personal injury claim and have any other way to make money, (i.e. Uber Eats, Door Dash, Instacart, friends, family etc.) then you are going to have a much better financial transaction with any of those other avenues than with one of these financial companies.
We guarantee it.