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Guide to Settlement Loans

What Are Settlement Loans?
Austin Kilham
Austin KilhamUpdated February 24, 2025
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If you’re in the middle of a lawsuit and you need money to help pay your bills in the meantime, you might be considering a settlement loan. These loans give you access to money before your lawsuit settles.However, settlement loans come with a number of drawbacks that you need to be aware of. Read on to learn more about what settlement loans are, how they work, and the potential risks involved to determine if this type of loan makes sense for you.

Settlement Loan Definition

Settlement loans, also known as lawsuit loans or pre-settlement funding, are financial advances provided to plaintiffs awaiting the resolution of a legal case. These loans help cover living expenses, medical bills, and other financial obligations while the case is pending. Typically, settlement loan companies will only offer settlement loans to individuals who are likely to win a lawsuit. Unlike traditional personal loans, settlement loans are non-recourse, meaning repayment is only required if the borrower wins or settles their case. This can provide much-needed financial relief for individuals facing prolonged legal battles.Recommended: Nonrecourse Loans Explained

How to Apply for a Settlement Loan

To borrow funds through a settlement loan, you apply to the loan company after filing your lawsuit. The company will look at the lawsuit and determine how likely you are to win and how much money might receive. Based on that information, they may offer you an advance. In doing so, they reserve the right to a portion, or all, of the award you receive when you win the suit. Settlement loan companies charge interest and fees in exchange for their services. The interest on settlement loans is typically extremely high, starting at 27% and going up to 60%. Repayment on the loan generally does not begin until after the lawsuit is settled. Once attorneys’ fees and court costs are paid, the settlement loan, which includes the principal plus interest, is repaid from the remainder of the amount you won.

Settlement Loan Requirements

Settlement loans are available to applicants with pending cases, including:
  • Personal injury cases
  • Motor vehicle accidents
  • Workplace accidents
  • Medical malpractice cases
  • Product liability suits
  • Wrongful death suits
When you apply for a settlement loan, the loan company will request information about your case, including the name of your attorney. They may then contact your lawyer to learn more about the details of the case, assess your odds of winning, and get a sense of how much the financial award might be. As mentioned, settlement loan companies generally offer loans to those who are likely to win their cases. If you don’t win your lawsuit, you may not have to repay the loan, depending on the terms of your loan agreement. And if you’re awarded a smaller amount of money than expected, you may not have to make up the difference with your lender. 

Settlement Loan Uses

Settlement loans could help you continue to pay your necessary expenses, such as medical bills, mortgage payments, car loan payments, and utilities while your lawsuit is pending. This may be particularly helpful if you are unable to work due to an accident or injury. 

Pros of Settlement Loans

Lawsuits can be time-consuming and expensive, but a settlement loan may help. Pros of settlement loans include:
  • Provides financial relief while waiting for a legal settlement.
  • No repayment required if the case is lost (non-recourse loan).
  • Can cover essential expenses like medical bills and living costs.
  • Helps plaintiffs avoid pressure to accept a lower settlement offer.
  • Quick approval process based on case strength, not credit score.

Cons of Settlement Loans

Settlement loans come with significant drawbacks, too, including:
  • High interest rates and fees can significantly reduce final settlement amount.
  • Not all cases qualify for funding, as lenders assess risk carefully.
  • Repayment amount can be much higher than the original loan.
  • May encourage prolonged litigation, increasing legal costs.
Limited regulation can lead to predatory lending practices.

Settlement Loan Alternatives

Because settlement loans can be costly and risky, it’s generally wise to consider alternative sources of funding. Here’s a look at some other pre-settlement financing options available. 

Credit Cards

Credit cards could be a way to help cover your expenses. If you are able to pay your credit card bill off in full each month, you will owe no interest on the amount you borrow. However, if you carry a balance on your card you will owe interest, and credit card interest rates tend to be high. If you decide to go with this option, use your credit card judicially for pre-settlement financing, and try to use it only when you know you’ll have the money to pay off the balance at the end of the billing cycle.

Personal Loans

With a personal loan, a bank, online lender, or credit union lends you a lump sum that you repay with interest in installments over time. Personal loans can be used to pay for living expenses, medical bills, legal fees, and more.Interest rates on personal loans tend to be much lower than the rates for credit cards and settlement loans. That said, your interest rate will generally depend largely on your credit score. In general, the higher your credit score is, the lower the interest rate you may be able to secure.  Recommended: Using a Personal Loan for Legal Fees

Personal Savings

If you have the cash on hand to pay for your expenses while your lawsuit is ongoing, this may be your best option. However, think twice before you drain your savings account because then you won’t have funds for unexpected expenses or emergencies that might arise. 

Family Loans

You could turn to relatives while your lawsuit is pending for a family loan to help make ends meet. In this case, it can be helpful to spell out in writing the amount borrowed, the repayment terms, and any interest being charged. Family loans may be complicated, however. The family member lending you money may have to pay taxes on the interest they earn. What’s more, family loans can lead to tension between relatives if the loan is not repaid according to the terms. 

The Takeaway

Settlement loans provide money to help cover a person’s living expenses while a lawsuit is ongoing. However, think very carefully before taking out one of these loans because they come with a number of risks and can be extremely costly. Consider other options instead, such as using your savings, asking a family member for a loan, putting expenses on your credit card, or taking out a personal loan to help get the financial help you need. If you need a personal loan, Lantern by SoFi makes it easy to find the best rates and terms for your needs. Simply fill out one quick form to compare multiple loan options and choose the one that fits you best.

Frequently Asked Questions

What is a settlement loan?
Is a personal loan a good alternative to a settlement loan?
Who qualifies for settlement loans?
Photo credit: iStock/whitebalance.oatt
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About the Author

Austin Kilham

Austin Kilham

Austin Kilham is a writer and journalist based in Los Angeles. He focuses on personal finance, retirement, business, and health care with an eye toward helping others understand complex topics.
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