Will I need to provide collateral to secure pre-settlement funding?

Pre-settlement funding is a financial solution used by plaintiffs who are awaiting the outcome of a legal case. The main purpose is to provide the plaintiff with funds to help with any financial burden incurred in the course of the legal proceedings such as lawyer fees, missed work, medical costs, and other bills that can add up leaving the plaintiff in a vulnerable financial position. Given the high financial risks associated with pre-settlement funding, most lenders may require collateral in order to secure a loan.

What is collateral?
Collateral is an asset given to a lender as security when obtaining a loan. This may be a valuable item of the borrower’s like a house, stocks, jewelry, or a car. In some cases, the lender may use the property of the borrower, but with pre-settlement funding this is much less likely, as the borrower has yet to receive the settlement award. In the event the borrower does not repay their loan to the lender, the lender can then take possession of the collateral as payment.

Do lenders of pre-settlement funding always ask for collateral?
No, most lenders of pre-settlement funding do not require collateral to secure a loan. This is mainly because pre-settlement funding is an agreement made between the lender and the plaintiff on a contingency basis, meaning the lender doesn’t expect the plaintiff pay back the loan until the settlement award is determined. As the loan is not secured by any property or assets of the plaintiff, lenders will not ask for collateral in return for lending.

However, there may be times when a lender may ask for collateral and that is when the lender deems the plaintiff’s lawsuit and settlement prospects to be more risky. This is known as a “high-risk loan” and requires additional protection, usually in the form of collateral. The lender may even require the borrower to give up their share of the settlement as collateral.

What types of collateral can a lender ask for?
Collateral for a pre-settlement loan can vary, depending on the type of lawsuit the plaintiff is involved in and the severity of the risk associated with the loan. Most lenders will use the settlement itself as collateral, meaning that if the plaintiff does not repay their loan, the lender will take a portion of the settlement award for payment. Other forms of collateral that may be used include real estate, vehicles, jewelry, and personal property.

Will I be asked to pay interest or fees?
Most lenders of pre-settlement funding will expect the plaintiff to pay additional interest, fees, and other costs associated with the loan. These costs may include financing fees, transaction charges, and appraisal fees, among others. While these additional charges can amount to a sizable amount over the course of the loan, they are often unavoidable and are necessary to secure the loan.

Conclusion
Given the high financial risk associated with pre-settlement funding, most lenders may require collateral in order to secure a loan. The types of collateral vary, but in most cases the lender expects the settlement itself to be used. Additionally, the borrower can expect to pay additional interest, fees, and other costs associated with the loan.