So what is a litigation loan?
A litigation loan is a type of loan that some banks or niche loan companies may provide to certain individuals who are not able to fund their own litigation themselves for one reason or another. Importantly, the litigation loan provider will charge an interest rate fee for the duration of the loan, and will also expect the loan to be repaid, no matter what the outcome of the dispute.
Therefore litigation loans should not be confused with the more traditional litigation funding, also know as third party litigation funding, which is generally provided to commercial clients on a non recourse basis. A non recourse basis means that the funder will not seek their principle funds back, nor any interest thereon if the litigation case ultimately fails.
The reason litigation funders can do this is because they are very selective about the cases they choose to fund, and also because they charge very high returns on the cases that they do win. For example, funders will expect a return of 2x, 3x or more, whereas litigation loan firms interest rates would be nearer to the usual consumer lending rates of 15% -25%.
Litigation loans are more common in matrimonial and divorce proceedings, which may be because a former partner has cut them off from joint funds they once had access to during their relationship.
These litigation loans are usually secured against capital that will be recovered at some point in the future, such as the proceeds of a house sale, or pension sharing order etc.
If there was no money available in the dispute, or no chance of recovering any money from the litigation, then the litigation loan providers or banks would not provide the funds.
If you are considering taking out a litigation loan, then make sure you are aware of when and how the interest and capital is due to be paid. You may even be able to secure insurance for this liability in some circumstances.
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