Loans For Legal Fees: Help Clients Pay in Installments
Law professor and economist Gillian Hadfield from University of Toronto estimates that 80 percent of the U.S. population can't afford legal fees. That aligns with current data on savings balances in U.S. households. According to a recent Bankrate report only four in 10 Americans have enough savings to cover an unexpected expense of $1,000.
U.S. households are low on cash, and it affects their access to legal representation.
One potential solution is the legal loan, which, as the name suggests, is a loan to pay lawyer fees. Legal loans are available from both banks and private lenders. Your firm can also offer financing for legal fees indirectly, by partnering with a lender. With the right setup, this partnership streamlines bill payment for you and provides cash-strapped households access to legal help.
This guide explains how law firms can facilitate loans for attorney fees, ethically and responsibly. You'll also learn how offering a legal loan benefits your firm, as well as what qualifications to consider before rolling out legal loans and how to get started.
What Are Loans for Legal Fees?
Loans for lawyer fees are unsecured, personal debts that the borrower uses to pay for a lawyer. Typically, the loan has a fixed interest rate and fixed monthly payment. The repayment schedule can range from a few months to several years, depending on the loan amount and the borrower's credit qualifications.
Why Is It Important to Offer Loan Options for Your Legal Fees?
If your firm does not offer legal loans, you are limiting your available client base. As noted above, an estimated 80% of the population cannot afford legal representation. Even if your firm is in an affluent area and you primarily serve wealthy individuals, it's unlikely that every prospective client has enough cash or credit to cover their legal expenses.
Those would-be clients who feel they can't afford lawyer fees will either forgo representation or find a law firm that is more accommodating. You don't want to lose a client to a competitor, simply because the other firm has a loan program, and your firm doesn't.
Benefits of Offering Legal Fee Loans
Under the right circumstances, an in-house financing program can deliver significant benefits to your firm. These benefits include access to a wider client base, improved cash flow, and a richer customer experience. Let's look at each of these.
1. Access to a Wider Client Base
An in-house loan offering will increase the number of clients who can realistically retain your firm. Letting prospective clients know about your firm's financing option during their initial consultation can prevent them from declining services due to cost.
2. Improved Cash Flow
Your in-house loan program can deliver the borrowed funds directly to your firm. Gaining cash upfront from a case is better for the firm, and advantageous to the client as well. You can begin representation immediately, rather than waiting for clients to accumulate funds over time in installment payments.
Note that your firm faces no repercussions if the client doesn't repay the loan as scheduled. Repayment issues are handled privately between the lender and the client. The lender cannot legally ask your firm to repay any of the client's borrowed funds.
3. Richer Customer Experience
You may have prospective clients who want to borrow money to pay their lawyer, even if they don't need to. You also may have current clients who are delaying the legal process until they have the necessary funds on hand. A new, fixed-rate loan can be less disruptive to household finances than, say, liquidating investments or charging retainers to a credit card.
Furthermore, there is also a population of would-be clients who expect your firm to support a wide range of payment options, including loans for lawyer fees. A legal loan is similar to the point of sale installment loans that certain retailers offer. Your clients often see these programs available through Amazon, Macy's, Target, Walmart, and others.
Your firm's financing program may be a necessity for cash-strapped clients, but it's also a convenience for any other client your firm may be able to help.
Qualifications to Consider Before Offering Loans for Legal Fees
Before exploring how your firm might roll out a loan program, consider whether the initiative is appropriate for your client base.
Ideally, your typical client would meet or exceed the lender's standards for creditworthiness. If most of your clients wouldn't qualify for credit, your firm's loan offering could be counterproductive. Denied loan applications don't serve your firm or the individuals who need legal help.
Two primary loan considerations are the client's credit score and the loan amount.
1. Credit Score
A person’s credit score is a numeric measure of their ability to manage debt. People who make late payments or use a high percentage of their available credit tend to have low credit scores. Those who routinely pay their bills on time and manage their debt accounts conservatively have higher credit scores.
There are three major credit bureaus that report credit histories and calculate credit scores. Lenders, including legal lenders, rely heavily on this data to make loan underwriting decisions. Typically, loan applicants with credit scores below 670 have trouble getting loans approved. When these applicants do receive loan approvals, the loans carry higher-than-average interest rates.
You may not know the typical credit score of your client base. You do, however, have experience billing your clients. From that experience, you may be able to generalize their financial health.
2. Loan Amount
The loan amount is a primary factor in the borrower's ability to repay the debt. The payment on a $5,000 loan will be far less than the payment on a $15,000 loan, assuming both have the same interest rate and repayment schedule. For this reason, lenders are more likely to accept lower income and lower credit scores on smaller loans vs. larger ones.
You know the range of fees your firm collects from clients. That data can help you decide how useful a loan offering will be for your firm. Ideally, your typical customer can qualify for a loan that funds your average revenue-per-client.
If your clients generally have low credit qualifications, then an installment program may be more suitable for your firm.
How to Offer Legal Fee Loans at Your Law Firm
Your firm cannot ethically loan money directly to your clients. You can, however, partner with a loan provider. An efficient option is LawPay's ClientCredit solution, which a legal fee lending solution built into LawPay's payment software. ClientCredit offers distinct advantages in the areas of compliance, integration, and direct delivery of funds.
Your loan program must follow American Bar Association (ABA) and Interest on Lawyers' Trust Accounts (IOLTA) guidelines, without exception. This shields you from inadvertent ethics violations that can result from charges against trust accounts.
LawPay is a recognized leader in payment management for the legal industry. Our software, including ClientCredit, is fully compliant with ABA and IOLTA guidelines. More than 100,000 law firms trust LawPay to process client payments securely and ethically.
Payments that use ClientCredit can be directed into trust accounts or operating accounts. LawPay will never debit fees from trust accounts.
Your loan program must integrate into your billing software and workflow. Without integration, the loan offering increases the workload for your staff and makes it harder for clients to pay you.
By using ClientCredit through LawPay, your client will see ClientCredit as an additional online payment option, alongside credit cards and eChecks. When clients select this option, it initiates the loan application process, similar to the point of sale installment loan options offered by major retailers. The application collects some personal information, and the client receives a real-time decision on the loan. The entire process takes only a few minutes.
ClientCredit supports loans from $150 to $17,500 to individual customers only. Business customers are not eligible for loans through ClientCredit.
Direct Delivery of Funds
You cannot rely on a loan program that requires your clients to collect money from the lender and then pass it along to your firm. This would likely result in lost funds, plus more time spent on bill collection.
ClientCredit delivers the borrowed funds directly to your firm via Automated Clearing House (ACH) after the loan is approved. Settlement of funds usually takes three to five days following loan approval.
The payment is recorded and credited to the client, just as a credit card or eCheck payment would be. Since LawPay integrates with dozens of accounting and legal software programs, the entire process should be seamless, for your clients and your office staff.
Personal Loans for Attorney Fees: Necessary and Convenient
Individuals who cannot afford legal fees upfront will either delay their legal help or find a way to borrow funds. You can streamline this process for them with an in-house loan option. Some clients may initiate a loan to pay lawyer fees out of necessity, while others will borrow for convenience. Either way, your firm receives payment upfront and can begin representation immediately.
Schedule a demo today to see how ClientCredit can facilitate faster payments and improved cash flow for your firm as well as better customer experiences for your clients.