Understanding the Costs of Pre-Settlement Funding

Pre-settlement funding can provide crucial financial support for plaintiffs, but it comes with costs. This article breaks down the typical costs associated with pre-settlement funding, including interest rates, fees, and other charges.

Types of Costs

1. Interest Rates
   • Funding companies charge interest on the cash advance, which accrues over time. Interest rates can be simple or compound, with compounding interest significantly increasing the overall cost.
2. Administrative Fees
   • Some companies charge administrative or processing fees for evaluating the case and managing the funding arrangement. These fees are usually deducted from the advance amount.
3. Origination Fees
   • Similar to administrative fees, origination fees cover the cost of initiating the funding process. They are typically a percentage of the advance amount.
4. Underwriting Fees
   • Underwriting fees cover the cost of assessing the risk and potential of the legal case. These fees may be included in the overall cost structure.
5. Annual Percentage Rates (APR)
   • The APR represents the total annual cost of the funding, including interest and fees. It provides a comprehensive view of the funding's expense over a year.

Cost Examples

1. Simple Interest Example
   • A plaintiff receives a $10,000 advance with a 20% simple interest rate. After one year, they owe $12,000 ($10,000 principal + $2,000 interest).
2. Compound Interest Example
   • With a 20% compound interest rate, the same $10,000 advance would accrue interest on the principal and accumulated interest. After one year, the owed amount could be higher than with simple interest.
3. Fee Structure Example
   • A company charges a 5% administrative fee and a 3% origination fee on a $10,000 advance. The total fees would be $800 ($500 administrative + $300 origination), leaving the plaintiff with $9,200.

Factors Affecting Costs

1. Case Strength
   • Stronger cases with higher settlement potential may attract lower interest rates and fees due to reduced risk for the funding company.
2. Funding Amount
   • Larger advances may have different fee structures and interest rates compared to smaller amounts.
3. Funding Duration
   • The longer the case takes to settle, the more interest accrues, increasing the overall cost.

Reducing Costs

1. Negotiate Terms
   • Plaintiffs can negotiate with funding companies to secure better terms, such as lower interest rates or reduced fees.
2. Compare Providers
   • Shopping around and comparing offers from multiple funding companies can help plaintiffs find the most cost-effective option.
3. Early Repayment
   • Some funding companies offer discounts for early repayment, which can reduce the overall cost.

Understanding the costs associated with pre-settlement funding is crucial for plaintiffs seeking financial support. By considering interest rates, fees, and other charges, plaintiffs can make informed decisions and manage their financial obligations effectively during legal proceedings.