If your law firm regularly manages complex litigation, especially contingency-based cases, you’ve likely encountered moments where traditional cash flow just isn’t enough. Whether helping clients cover expenses while waiting for a settlement or keeping your operations running smoothly, choosing the right legal funding option is a strategic decision.
There are two main paths firms consider: lawsuit loans (also known as pre-settlement funding or litigation financing) and traditional bank loans. Each comes with its own application process, repayment terms, and risk considerations. Knowing how they differ can help you make smarter recommendations to your clients—and more informed choices for your own firm.
This guide breaks down the key differences between lawsuit loans and bank loans, showing how each option aligns with different legal and financial scenarios. You'll gain clarity on legal financing options that best support your client outcomes while preserving your firm’s long-term financial health.
What Are Lawsuit Loans?
Lawsuit loans, often called pre-settlement funding, litigation financing, or lawsuit cash advances, are unique financial products designed for plaintiffs involved in ongoing litigation. As a law firm, you might recommend these to clients who are struggling financially during a long legal process.
What makes lawsuit loans different from traditional loans is their non-recourse structure. That means your client only repays the advance if they win or settle their case. If the case is unsuccessful, they owe nothing. This helps clients stay financially afloat without being pressured into early, low-ball settlements just to make ends meet.
The approval process for lawsuit loans is also very different from conventional financing. The focus isn’t on credit scores or income; it’s entirely on case strength and potential settlement value. After a case is reviewed and approved, clients can often receive funds in just a day or two, providing immediate relief during critical times.
What Are Traditional Bank Loans?
Traditional bank loans are exactly what you’d expect: standard financial products offered by banks and credit unions, often used by law firms or clients for business or personal financing. These loans require the borrower to repay the full amount, plus interest, whether the case is successful or not.
For law firms, you might look into bank loans like commercial lines of credit, practice loans, or working capital loans. Clients might explore personal loans or secured borrowing, depending on their situation. The key feature across all these options is the same: you borrow a set amount, and repayment is mandatory, regardless of the outcome of any lawsuit.
Bank loans usually have lower interest rates than lawsuit loans, but they’re also harder to qualify for. Applicants need good credit, income documentation, and sometimes collateral. Depending on the complexity of the application, the approval process can take anywhere from one to four weeks.
Litigation Funding vs. Traditional Bank Loans: How Do They Differ?
When you’re weighing legal funding options for your firm or advising clients, it’s important to understand how lawsuit loans and traditional bank loans compare. The two fundamentally differ in assessing risk, approving funding, and handling repayment. These differences can directly impact client outcomes and your firm’s financial stability.
Credit Check Requirements
Traditional bank loans almost always require a credit check. If your client or your firm doesn’t have a strong credit profile, the application could be denied or approved with high interest. Lawsuit loans don’t use credit scores. Approval is based entirely on the strength of the legal case, not personal financial history.
Collateral Needs Differ
Banks typically want collateral, whether that’s a home, business assets, or a personal guarantee. That puts property and finances at risk if the borrower can’t repay. Lawsuit loans, on the other hand, use the expected settlement as the only collateral, which means there’s no risk to personal or firm assets.
Repayment Terms Vary
With bank loans, repayment is fixed, you owe the money no matter what happens in the case. This can create financial pressure if a case doesn’t go as expected. Lawsuit loans are non-recourse, which means if your client loses the case, they owe nothing. That risk is taken on by the funder, not the borrower.
Funding Approval Timeline
One can obtain a lawsuit loan very quickly. Funds are often approved and disbursed within 24 to 72 hours once the case is reviewed. Bank loans take longer, typically one to four weeks, due to document checks, underwriting, and internal approval processes. This timing difference can be critical for time-sensitive litigation or urgent financial needs.
Risk Allocation Differences
With a bank loan, the borrower carries all the risk, whether it's your firm or your client. If the case doesn’t settle or drags on, repayment is still due. With a lawsuit loan, the risk shifts entirely to the funding company. If the case fails, the borrower walks away with no repayment obligation.
Interest Rate Structures
Bank loans generally offer lower interest rates, typically ranging from 5% to 25%, depending on credit and collateral. Lawsuit loans have higher rates, sometimes exceeding 40% annually or involving compounding fees. The higher cost reflects the non-recourse nature and elevated risk the funder takes on.
How to Choose Between Lawsuit Loans and Traditional Bank Loans
As a law firm, your role isn’t just legal, it’s advisory. Helping clients (or your own practice) choose the right legal financing option means balancing risk, cost, timing, and case strength. Each scenario is different, so a structured approach can guide better decisions.
Assess Credit Worthiness
Start by looking at credit. If your client has a strong credit score and steady income, they may qualify for a traditional loan with better terms. If not, or if your firm needs flexible financing for contingency-based cases, a lawsuit loan may be the only viable option.
Evaluate Case Strength
Because lawsuit loans depend entirely on the legal merits, your team must evaluate the case thoroughly and objectively. If the case lacks strong documentation or liability clarity, funding approval may be unlikely or come at a higher cost. Solid, well-documented cases open more favorable options.
Compare Interest Rates
It’s your responsibility to help clients or partners understand the full cost of borrowing. This includes interest rates, fees, and how those costs accumulate over time. Even if a lawsuit loan gets approved quickly, the long-term repayment amount might outweigh the benefits if not carefully considered.
Consider Repayment Terms
Non-recourse repayment can offer peace of mind, especially for clients with limited financial backup. But it comes at a cost. If your firm or client can comfortably manage fixed payments regardless of case outcome, a traditional loan may be more cost-effective in the long run.
Consult Within Your Firm
Collaboration is key for practice-level decisions. Involve partners, financial officers, and litigation specialists in the discussion. Their combined insights on case timelines, expected settlements, and risk exposure will help your firm choose the most strategic funding route.
What Are the Main Requirements for Getting Lawsuit Loans and Traditional Bank Loans?
Understanding how each funding option is evaluated helps your firm prepare clients, or prepare itself, for the application process. The qualification criteria differ dramatically between lawsuit loans and bank loans.
Case Merit Assessment
Lawsuit lenders care about one thing: the legal case. They’ll want a full case file, liability evidence, damage estimates, and supporting documentation. Your role is to help package that information clearly and efficiently.
Legal Representation Verification
Most lawsuit lenders require that a qualified attorney represent the client on a contingency basis. Your firm’s reputation, litigation track record, and willingness to cooperate during the funding process can directly impact approval and terms.
Credit Score Evaluation
Traditional banks rely heavily on credit history. A low score or inconsistent credit usage can limit loan options or increase rates. Lawsuit lenders typically ignore credit altogether. They only care about the case's potential value.
Income Documentation Needs
For bank loans, clients or firms must show proof of income, tax returns, and sometimes employment verification. Lawsuit lenders don’t ask for this, since repayment depends on the settlement, not income streams.
Which Legal Funding Option Has Lower Interest Rates?
If you compare legal funding options purely on cost, traditional bank loans almost always win. Their annual percentage rates (APRs) usually range from 5% to 25%, depending on credit, income, and collateral. These are regulated financial products that help keep rates relatively consistent and predictable.
Lawsuit loans, however, are much more expensive. It’s not uncommon to see annualized rates exceed 40%, especially when factoring in compounding interest or tiered fee structures. Why the difference? Lawsuit loans are non-recourse, meaning the lender only gets repaid if the case wins. That risk justifies the higher pricing.
It’s important to break this down clearly for your clients. While lawsuit loans offer risk protection, they can significantly reduce the net proceeds from a settlement. Traditional loans may be harder to qualify for, but if they’re accessible, they usually offer a more affordable option over time.
How Quickly Can You Receive Funds from Different Legal Options?
When urgency is a factor, as it often is in litigation, speed matters; this is where lawsuit loans typically shine. Once a case is approved, funds are usually disbursed within 24 to 72 hours. There’s no waiting on credit checks, income verification, or collateral reviews. If your client needs money fast to cover living expenses or if your firm needs capital to support a time-sensitive case, this speed can be a major advantage.
In contrast, traditional bank loans take longer. Even for well-qualified borrowers, it can take 1 to 4 weeks to complete the approval process. Between document collection, underwriting, and final approvals, bank funding just moves slower. For law firms or clients with pressing financial needs, this delay can impact case strategy, operations, or personal well-being.
To help streamline the lawsuit loan process, your firm can prepare a comprehensive case summary upfront, complete with liability evidence, damages documentation, and expected timelines. This proactive step improves your chances of fast approval and avoids back-and-forth delays.
Conclusion
When comparing legal funding options, the choice between lawsuit loans and traditional bank loans comes down to risk, cost, and timing. Lawsuit loans offer fast, non-recourse funding based on case strength, but come at a higher cost. Bank loans offer lower rates, but require strong credit, steady income, and repayment regardless of the case outcome.
As a law firm, you play a critical role in helping clients understand these differences and guiding them toward the best solution for their situation. That also applies to your firm’s own financing needs. Whether you're managing a case portfolio or advising an individual plaintiff, your recommendations should be based on a clear evaluation of credit standing, case strength, urgency, and repayment ability.
Ultimately, the right funding choice isn’t just about money; it’s about supporting legal outcomes, preserving financial stability, and building a path toward success for everyone involved.
FAQs
Are lawsuit loans easier to qualify for than bank loans?
Yes. Lawsuit loans don’t require a credit check or income verification. Approval is based on the strength of the case, not the borrower’s financial background.
Do legal funding options require credit checks?
Traditional bank loans do. Lawsuit loans usually do not. Funders assess the legal case itself, not personal credit history.
How does repayment work for lawsuit loans vs. bank loans?
Lawsuit loans are non-recourse; they’re repaid only if the case wins or settles. Regardless of legal outcomes, bank loans must be repaid in full, with interest.
Do legal funding options cover all litigation expenses?
They can, depending on the arrangement. Lawsuit loans often cover clients' personal living expenses, while law firm funding can cover operational or case costs. Bank loans may be used more broadly but require personal or business liability for repayment.
