5 Reasons Entrepreneurs Should Rethink the Lawsuit Loan Industry

For most plaintiffs, funding a lawsuit can be incredibly expensive. Even though most personal injury attorneys work on a contingency basis, the financial strain involved in pursuing a case causes some people to settle too early or avoid filing a lawsuit at all. 

So, how do so many people afford the legal cost of their lawsuits? Look no further than consumer legal funding.

Consumer legal funding, also known as a lawsuit loan, offers plaintiffs immediate cash in exchange for a portion of their settlement. Much like payday loans, these cash advances accrue interest until they are paid back. However, unlike a traditional loan, lawsuit loans aren’t considered loans in most states and remain largely unregulated. This is because the cash advance is usually non-recourse, which means the plaintiff doesn’t have to pay back the loan if they lose their case.

Since the 1990s, the lawsuit loan industry has been on the rise, especially over the past five years. However, some states have banned lawsuit lending believing that, without regulation, excessive lending promotes frivolous lawsuits. Despite the lack of federal regulation, lawsuit lending is a great opportunity for entrepreneurs that don’t mind a little risk and have some capital to spare. There are many legal funding businesses with a strong Internet presence as well. Click here to view an example website.

Here are five reasons you should rethink the lawsuit loan industry and its potential as a business opportunity.

1. Lawsuit Funding is On the Rise

According to the New Yorker, the legal funding industry was a $3 billion asset in 2016. In addition, a report from Burford Capital found that the number of US lawyers who used legal financing quadrupled from 7% in 2013 to 28% in 2015. Overall, lending has increased by more than 400% in the US between 2013 and 2017.

As the industry continues to grow, more and more third-party lenders are popping up around the US. While there is a lot of competition, it’s clear that more and more people are turning to lawsuit loans and demand is increasing rapidly.

2. Trade Groups Provide 90% of All Legal Funding in the US

Since there are few federal regulations for the lawsuit loan industry, leading lenders have started their own trade group to create standard business practices and ethical guidelines. The largest of these groups, the American Legal Finance Association (ALFA), provides 90% of all legal funding in the US.

With more than 30 members, ALFA has its own code of conduct which requires member lenders to restrict overfunding, create honest advertising, and provide reasonable repayment negotiations for clients who receive a lower settlement than expected. In addition, the ALFA provides links to third-party research about lawsuit loans, including articles from major law journals and organizations like the Cornell Law Review, the Cardozo Law Review, and the American Bar Association.

3. Lawsuit Loans Have a High Rate of Return

Like an actual loan, lawsuit lending utilizes interest rates. Generally, the interest rate of a lawsuit loan ranges from 3-4% monthly, or 37-60% APR. Since lawsuits typically take months or even years to resolve, the rate of return is high.

For example, let’s say a lender offers $25,000 to a plaintiff at a rate of 2% per month. The lender expects the case to settle for around $100,000 based on the information provided by the plaintiff’s attorney. After 12 months, the case settles for $100,000, which means that the lender receives the principal amount of $25,000 plus 24% interest. In total, the lender earns $31,000, which is $6,000 more than their original investment.

4. More Plaintiffs Are Filing Personal Injury Cases

While the total number of civil cases has increased over the past several years, personal injury claims have increased the most. According to a report from US Courts, the number of personal injury cases filed in a US District Court almost doubled between 1990 and 2019.

In 2018, there were more than 62,000 personal injury claims filed in a US District Court. However, in 2019, the number of personal injury cases filed increased by more than 20% from the previous year, making up nearly a third of all civil cases in the United States.

A majority of these claims involved medical malpractice, dangerous pharmaceuticals, motor vehicle accidents, and marine injuries. It may come as no surprise that since these cases are on the rise, a majority of legal lenders provide funding for personal injury cases exclusively.

5. Personal Injury Cases Involve High Settlement Amounts

According to a study from Nolo, around 70% of personal injury claimants receive an out-of-court settlement or a judgment. In addition, nearly half of all claimants surveyed received a payout of $10,001 to more than $75,000. However, a third of all claimants receive anywhere from $3,000 to $10,000 for their case.

Most importantly, claimants with a lawyer managing their case were more likely to receive a payout and received a higher amount. The average compensation for claimants with a lawyer was more than $75,000, while claimants without legal representation received almost 80% less.

Since plaintiffs must have a lawyer representing their case to receive legal funding, lenders reduce their risk by funding stronger cases. This makes lawsuit loans a safer investment than other financial ventures.

Entrepreneurs Should Rethink Their Opportunities in the Lawsuit Loan Industry

Whether this is your first time starting a business or you’re planning your next business venture, the lawsuit loan industry is full of opportunities. While mostly unregulated, lawsuit lending is increasing significantly in popularity and has grown into a nearly $3 billion industry. As personal injury claims continue to rise throughout the US, this is undoubtedly the best time to consider your options in legal funding.

Josh Brown is a marketing expert in the legal industry.  As a former editor in the health and fitness industry with a prolific body of work in various magazines from FLEX to event promotions with the Mr. Olympia Weekend, Josh now enjoys providing content in the law vertical.  He currently resides in Atlanta, GA.

5 Reasons Entrepreneurs Should Rethink the Lawsuit Loan Industry

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