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Settlement Advances: Financial Salvation or Trap for the Vulnerable?

May 20, 2019 • by Bruce Wiener

If you have suffered an injury as the result of the negligence of someone else, particularly a motor vehicle accident, you are probably already aware of the financial hardship that can result.  Medical bills begin piling up on top of car payments, rent, grocery bills, and all of the other expenses of daily living.  If the injury kept you off the job for more than a few days, the problem becomes even worse.

It is also likely that you have heard about, or even had contact with, a finance company which offers you an “advance” on your “settlement”.  The pitch is that you will have the money now to meet your expenses, and there is no need to pay them back until your case settles.  The best part of the deal is that, if your case does NOT settle, there is no need to pay them back at all!!

It sounds too good to be true…is it?

Sometimes these loans can, indeed, be the only solution.  But before you decide whether one is right for you, there are a couple of things you should investigate carefully.

First, check the interest rate.  It is usually stated in an amount per month, rather than the more typical APR, or Annual Percentage Rate, so the number appears quite small.  Since most people assume that their recoveries, and their cases, will proceed much more quickly than they actually do, it is normal to think you will only need the loan for two or three months.  In truth, the annual percentage rate for these loans can be shockingly high, exceeding even the exorbitant amounts charged by the credit card companies on any outstanding balance.  An accident victim is often in treatment for 6 months or more, and sometimes several years of treatment and therapy will be required before the case is ready to settle.  Even when treatment has been completed, the process of assembling all of the records and negotiating with the insurance company can add months more to the length of the loan, and if the case does not settle and must enter, and proceed through, the court system, it can be up to two more years before a resolution is achieved…all the while the interest continues to accumulate.  At the rate of interest most of these companies charge, it is entirely possible that the interest on the loan could exceed the actual amount borrowed!

Secondly, the amount of these loans in most cases is usually quite small ($1,500 or less) unless there is an unusually serious injury…far too small to pay rent or mortgage, therapy bills, or other large debts.  These companies do not lend based upon what the borrower needs, but rather the amount they are comfortable extending, given the facts and circumstances of your pending case.

Third, the “no settlement, no repayment” guarantee is not as enticing as it might appear, since these companies rarely lend on cases they do not perceive as clear cut winners.  If your case does not meet that test, it is unlikely that any loan at all will be offered. 

Fourth, the application process can be complex, as the lending company, obviously, wants as much information about the size and likely success of your case as possible.  You will be required to furnish extensive information about the case, including accident reports, medical bills, chart notes, witness statements, etc. and could wind up spending a great deal of time applying for only a small amount of money.

Fifth, if the resolution of your case is prolonged, due either to extensive treatment which must be completed first or resistance to the claim by an insurance company which refuses to extend a satisfactory offer, the settlement which is ultimately obtained and which could have gone a long way to solving financial issues had it been left intact is now so decimated by interest charges and application fees that the remaining sum is no longer sufficient to provide much help. 

Of course, desperate times often call for desperate measures, and an accident victim may have no where else to turn.  In those circumstances, there is no option.  However, these loans are indisputably a very expensive last resort and should be agreed to only after careful thought, and after reading the entire proposal thoroughly.  A consult with an attorney experienced with these types of loan proposals is always a smart move as well. 

 

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