Litigation funding or legal financing is a relatively new concept but one that's seen steady popularity over the years. It also has its share of suspicious onlookers who view it as badly as they do a loan.
Litigation funding is like a traditional loan
Strictly speaking, litigation funding is a type of loan as it involves a lender giving a plaintiff money which is repaid once a settlement is reached. However, it's also very different in that the plaintiff doesn't have to repay the amount if he loses the case. He pays only if he wins. In this way, litigation funding is not a loan but merely a solution to the problem of not being able to fund legal fees alone.
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Since lenders stake a lot by risking their investment on a plaintiff, the rate of interest can sometimes be quite high. This is understandable and to be expected as even a bank loan is not without interest. And before one assumes that this percentage will take a big chunk out of the settlement amount, rest assured it's typically well below it. This is one of the reasons why consulting a lawyer is always advised as the fine details of funding can be explained and understood with no nasty surprises.
Abuse abounds in the litigation funding industry
Many arguments have been put forth against the litigation funding world with some opponents claiming that it encourages useless lawsuits. However, it's important to understand that lenders only lend money to plaintiffs who have a good chance of winning and not just anyone. It's a business after all, and lenders must protect their investment.
Other naysayers argue that the final amount to be paid to the lender is huge as the interest rate is very high. This, again, is not necessarily true and if it were, the same could be said of taking out a personal loan from the bank to cover legal fees. What can be done to reduce the odds of paying a large sum come settlement time is to stick with a lending company that offers competitive interest rates. Go over the terms and conditions with a fine toothed comb so that you pay an amount you fully expect.
Lawyers and funding don't mix well
This is largely false but may be true for a few. The fact is, litigation funding gives the plaintiff and his lawyer the means to battle out the case till a settlement they want is reached. The same can't be accomplished without funds.
It's true that most lenders' policies stipulate that the lawyer gets paid only if the case is won but this isn't always so. Moreover, sufficient funds give lawyers the tools to get the settlement their clients are fighting for which means when the settlement is finally reached, the money they make in contingency fees is quite high. Most attorneys find this attractive and don't shy away from plaintiffs who decide to apply for litigation funding.
Like all money-lending institutions, litigation funding companies regularly come under the scanner. The fact that the concept is relatively new makes people more suspicious. What we must understand is that if care is taken when selecting a funder and if the process is overseen by a trusted lawyer, few things can go wrong.
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