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How Is a Settlement Loan Different From a Traditional Loan?

As of November 2020, the average US consumer carried a personal debt amounting to $92,727. That’s on top of the average mortgage debt of $208,185.

All those debts result from consumers taking out traditional loans. Because they’re conventional, they’re the most commonly utilized form of credit.

However, there are now other forms of financial services, such as a settlement loan. Settlement loans have eligibility and repayment terms different from traditional loans.

To that end, we created this guide comparing settlement vs. traditional loans. Read on to discover who can apply for and what to expect from a settlement loan.

What Is a Settlement Loan?

Settlement loans allow claimants or plaintiffs to cash in on an expected settlement. Claimants are individuals who file an insurance claim against another entity. Plaintiffs are those who bring a case against another party in court.

Let’s say you filed a personal injury claim against another party. Let’s also assume your lawyer anticipates you to receive a $25,000 settlement amount.

If you apply for a settlement loan, you can tap part of that legal award even before you receive it. In this case, a litigation financing company will purchase interest on your claim. In exchange for the purchase, the financing company then pays you in cash.

That’s why settlement loans also go by the name pre-settlement loans. The term “pre” means you can liquidate part of or most of your settlement long before you get the check for it.

What Is a Traditional Loan?

A traditional loan is a financial service in which a lender lends a borrower a sum of money. In exchange, the lender applies an interest rate on the principal (amount lent). The borrower then pays back the principal and interest, usually in monthly increments.

Traditional loans include mortgages, auto loans, personal loans, and student loans. These are recourse loans, which means the lender can pursue the borrower if they fail to pay it back. In some cases, such as in mortgages or auto loans, the lender can seize the property for payment failure.

Traditional vs. Settlement Loan

Unlike traditional loans, borrowers may not have to pay back settlement loans at all. That’s because pre-settlement loans are a type of non-recourse loans. That means the lender can’t go after the plaintiff for repayment if the plaintiff doesn’t win the case.

However, settlement loans are specific to borrowers with active claims or lawsuits. That means not everyone can apply; usually, just personal injury claimants or plaintiffs. You can check out this guide to know more about pre-settlement funding for specific cases.

Another key difference is that most litigation financing companies don’t prioritize credit scores. Instead, their main eligibility factor is the plaintiff’s probability of winning the case. So, even if you’re part of the 30.9% of US consumers with a poor credit score, you may still qualify for a settlement loan.

When it comes to repayment, you’d only have to make one over the life of a settlement loan. That’s when you receive your settlement award. The funding company then takes the cost of the loan from your received settlement.

Again, if you don’t win your claim or case, you don’t have to pay back the pre-settlement loan. By contrast, there’s no excuse not to repay a traditional loan on time.

Always Be a Responsible Borrower

As you can see, a settlement loan is a non-recourse loan designed for claimants or plaintiffs. By contrast, traditional loans are for consumers who need to have access to credit or funds.

If you have an active claim or lawsuit and have a lawyer, you may want to consider a pre-settlement loan. If you don’t but need financial help, then go for a traditional loan. Either way, be sure to borrow and spend only within your means.

Interested in more informative guides like this? Then feel free to have a look at our other recent posts!

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