Legal funding and traditional loans are two different financing mechanisms people often consider when facing a legal battle.
While both can provide the financial resources needed, there are significant differences between the two. This comparative analysis aims to dispel any confusion and help you make an informed decision about the best funding option for your legal case.
- Source and purpose of funding
Traditional loans: Traditional loans come from banks or other financial institutions and can be used for a wide variety of purposes, including legal costs. They are not tailored specifically to legal cases and do not take the merits of a case into account.
Legal funding: Litigation funding, also known as legal funding, litigation finance or lawsuit financing, is provided by litigation funding companies specifically to cover legal costs, and is directly tied to the lawsuit. It is intended to provide financial support for claimants pursuing a legal claim.
- Approval process and credit checks
Traditional loans: The approval of traditional loans usually requires a credit check and evaluation of the borrower’s ability to repay the loan. The borrower’s income, credit history, and existing debt significantly influence the approval process.
Legal funding: Litigation funders typically do not require credit checks. The approval process for litigation funding primarily considers the merits of the legal case, how long the case is likely to take to reach a conclusion, and whether the person or company that the claimant wants to sue (the defendant) actually has the money to pay any award that the court might order against it if the claimant wins the case. The claimant’s credit history is therefore not usually a determining factor.
- Repayment and interest rates
Traditional loans: Traditional loans require regular repayments, typically monthly, and these payments begin soon after the loan is issued. Interest rates can vary significantly based on the loan terms and the borrower’s creditworthiness.
Legal funding: Unlike traditional loans, legal funding is usually repaid from the proceeds of the lawsuit if it is successful. If the case is unsuccessful, the funds typically do not need to be repaid. As for the cost of funding, this can be higher than the rates of interest charged on traditional loans, but the non-recourse nature of the funding offsets this aspect.
- Pros and cons
Traditional loans: Traditional loans can be accessed relatively quickly, and the interest rates may be lower. However, the repayment may begin immediately, putting pressure on the borrower, and the borrower’s credit history may impact the approval and terms of the loan.
Legal funding: Legal funding is tied to the lawsuit, and if the case is unsuccessful, the claimant typically does not need to repay the funds. This approach reduces the financial risk for claimants. However, where the case is successful, the overall cost can be higher than traditional loans, to account for the risk that the funder took of not getting paid at all if the claimant lost their case.
Conclusion
When comparing legal funding and traditional loans, it’s essential to consider the pros and cons of each and understand how they align with your unique situation. Finance options for legal cases like litigation funding can provide a lifeline for claimants engaged in a legal battle. By understanding these funding options, you can make a more informed decision and choose the best path for your circumstances. At Sentry Funding, we are dedicated to helping you navigate these choices and find the right solution for your legal financing needs.
July 18, 2023
Insights
