Is Litigation Funding a Loan?

No — non-recourse pre-settlement funding is not a loan in the legal or financial sense. It is a conditional advance secured by future case proceeds, with no repayment obligation if the case is lost.

Non-recourse pre-settlement funding is not a loan, though it is often colloquially described as one. The technical distinction: a loan creates unconditional personal liability — you owe the money back regardless of what happens. Non-recourse funding creates conditional liability — you owe repayment only if your case produces a recovery. If the case fails, the obligation disappears entirely.

This distinction has significant legal implications. Loans are subject to usury laws that cap interest rates in most states. Because non-recourse funding is not a loan, many states have determined that usury statutes do not apply. This regulatory distinction is one reason pre-settlement funding rates can exceed conventional loan interest rates — the funder bears case-loss risk that a lender does not.

Some states have specifically classified non-recourse litigation funding as something other than a loan in their statutes — using terms like "purchase of a litigation interest" or "contingent advance." These statutory classifications confirm the non-loan nature of the product and provide the regulatory framework within which funders operate in those jurisdictions.

A minority of funders do offer recourse products — actual loans secured by a legal claim, where repayment is required regardless of case outcome. These are loans in the proper sense and are underwritten and documented as such. When comparing products from different funders, confirm explicitly whether the product is recourse or non-recourse before signing.

Source: ALFA Consumer Litigation Funding Code of Conduct. "Non-recourse" classification varies by state litigation funding statute.

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