What is a Litigation Loan?
A litigation loan is a type of funding arrangement, whereby monetary funds are loaned to either individuals or businesses in order to pursue and prosecute legal claims or disputes. This type of lending is also sometimes known as litigation funding, legal finance, disbursement funding, or third-party funding.
There are a few different types of litigation loan that can be taken out, and we shall discuss those in more detail below, but for now, it would be useful to describe in basic terms how a litigation loan works in practice, and why people or companies would provide such loans.
Who would provide a litigation loan?
Litigations loans are provided for the same basic reason as any other provider of loans, and that is to make money and profits for the lender. Some funders may suggest it is to facilitate taking meritorious legal cases forward for those claimants without the necessary financial resources, and that is a valid point, but the main reason is of course to make money.
Litigation loan providers can be either; companies, large corporations, credit brokers and even high net worth individuals, although the latter is less common in an already crowded market. High net worth individuals can participate in this asset class on some ready-made crowdfunding platforms.
Non-recourse litigation loan
Non-recourse loans are specifically designed by funders investing in legal disputes. This involves an independent third-party funder assessing a legal dispute, and if they are satisfied that it has sufficient prospects of success, and likely to win, they will invest their money in exchange for a significant return, but only in the event of a win.
If the legal case ultimately loses, they will lose their full investment as they will not claim it back from the client, i.e. that's why it's called a non-recourse loan.
The price for these types of litigation loan are often high, for example 2,3 or 4 times the amount invested.
Recourse litigation loan
Recourse loans are whereby a funder will provide funds for a claimant’s legal dispute, most frequently for basic disbursements such as expert reports, and unlike the above type of loan, they expect to get paid back win or lose.
They would expect to get back their initial capital plus an interest fee of circa 20%+ PA if your legal case won. They would also expect to get back at least their capital, possibly with some interest covered even if the case lost. This latter aspect is likely to be covered by an ATE insurance product.
Typical cases that can use a litigation loan.
There are many different types of legal dispute that can benefit from funding, for example; clinical negligence disputes, commercial legal disputes, mortgage mis selling disputes, pension mis selling disputes, PCP claims, Japanese Knotweed claims, mis sold car finance claims. With most of these examples, the costs of disbursements, and in particular expert reports are quite expensive, and therefore some sort of funding is required to get the case off the ground, as most people simply don’t have the several thousands of pound required to litigate a legal case.
It should be noted that these loans are for legal cases, and not standard loans for cars etc. that you would take out from a personal loan lender or credit broker.
Litigation Funding Articles