A legal fee loan is a type of personal loan. While the pieces are the same, a legal fee loan works a little differently from what you might expect from a standard personal loan. Let’s look at the elements that make up a legal fee loan:
Borrowing money helps you access the financial support you need, but it does come at a cost. Like most loans, legal fee loans need to be paid back with interest. The amount of interest you’ll pay on top of the amount you borrow is a percentage of what you owe. It’s usually measured as an annual rate and is called the Annual Percentage Rate (APR) or Advertised Rate.
And remember, the lowest interest rate doesn’t always mean the best loan for you. Be sure to consider the total cost of the loan including interest, fees and other costs to get a complete picture.
This is where most personal loans and legal fee loans differ. With a standard personal loan, once you receive your loan, you need to start paying it back through regularly scheduled repayments, either weekly, fortnightly or monthly.
A legal fee loan is different. It’s secured against your forthcoming property settlement and it’s not expected that you will have the cash to start repaying the loan until you receive this settlement. So, rather than repay the loan in instalments, you repay it as a lump sum out of your share of the property settlement once it’s finalised.
You also only access the money when you need it. So if you don’t draw down your entire loan amount, you’ll only pay interest on the amount you actually accessed.
The loan amount is the amount of money you borrow, plus any fees and charges capitalised into the loan amount. It’s this amount that you’ll pay interest on. However, with a legal fee loan, you only draw down the money as you need it. So you only pay interest on the amount you access.
In Australia, legal fee loans usually range from $25,000-$400,000.
When you take out a standard personal loan, you agree to the length of time it will take you to repay the loan. For personal loans, where you also commit to making regular repayments, lenders usually offer loan terms between 1 and 7 years.
With a legal fee loan, however, you’re only expected to repay the loan once your property settles. So the loan term for legal fee loans allows for this process to happen – typically up to 2 years. If your property doesn’t settle within the 2-year loan term, an extension may be available.
Most loans also come with an upfront cost to set up the loan. Known as upfront, establishment or application fees, they can include:
A flat fee (e.g. $499) that applies regardless of the value of the loan
A tiered fee (e.g. $250, $500, $750) based on the value of the loan
A percentage fee (e.g. 3%) based on the total amount borrowed and the credit or risk profile of the customer
A hybrid fee (e.g. $200 + 2% of the loan amount)
It’s up to your lender what fees they choose to charge. But keep in mind, these upfront fees aren’t actually paid upfront – they’re usually capitalised to the loan balance, meaning you pay them back with the remainder of the loan. This increases your total loan amount, meaning you’ll be paying interest on those fees as well for the life of your loan. If it’s a small upfront fee, it might not make much of a difference. But if the fees are significant, they can add thousands to the total cost of your loan.
Monthly or ongoing fees
Most loans also come with a monthly cost. Also called ongoing, account-keeping or loan management fees. These fees don’t go towards paying back your loan. In general, the lower the fees, the better. But as always, you should consider the total cost of your loan including all interest payable and other charges when you compare loans.
With a legal fee loan, you’ll still be charged a monthly fee, but it will also be capitalised into the loan, so you pay it at settlement.
If you turn to a broker to help you find finance, remember that you’ll be paying for their service, whether you realise it or not. It’s important to factor in these costs when you’re comparing your finance options. For personal loans, the brokerage fee will typically be capitalised to the loan amount and is in addition to the lender’s own upfront fee. Sometimes brokers also have commission arrangements with lenders, either built into your interest rate or offered as a return based on your interest rate.
Missed payment or ‘default’ fees are the most common penalty fee for personal loans. They’re a more relevant risk when you’re repaying your loan monthly, because one late payment can result in a fee. Late fees can vary from $10 to as much as $35 per default.
With a legal fee loan, you’re not required to make monthly repayments, so you’re at less risk of defaulting. If your settlement hasn’t come through by the end of your loan term, an extension might be possible.
When you’re making comparisons with other ways to finance your matter, there’s one more important question to answer: who will provide me the best experience? Look for a lender that makes it quick and easy to apply, get approved and manage your loan. These are good signs that a company values your experience, and that can go a long way to help you feel satisfied with your loan and trust that you’re getting a good deal.
How much does it cost?
To work out the overall cost of your legal finance, you need to factor in:
1. Loan Interest Rates: The biggest factor in how much a legal fee loan will cost you is the rate of interest you’ll pay on the amount borrowed. Legal fee loans can come with variable or fixed interest rates. If you are opting for a variable-rate loan, it is best to also calculate a worst-case scenario, one where a loan’s interest rates rise significantly in the future to be sure you have a comfortable buffer in the event things change. At Plenti, our legal fee loan interest rates are always variable. Interest is only paid on the amount outstanding, once a settlement is reached.
2. Upfront Fees: ‘Establishment’ or application fees for all loans can vary greatly, so it’s an area where shopping around can make a difference.
At Plenti, we have one upfront fee on our family law loans. The credit assistance fee is 4% on the amount of credit sought. This is a one-off fee capitalised to the loan at the time of the initial drawdown. This means you won’t actually pay the fee upfront, rather, it will be added to your repayments at the time of settlement.
3. Ongoing Fees: These fees are charged throughout the life of the loan. Common ongoing fees include:
Monthly or annual fees (also called account keeping fees)
Default, dishonour or missed payment fees
Hidden fees in the terms and conditions of a loan
At Plenti we never add hidden fees. We charge two types of ongoing fees for legal fee loans:
An $80 monthly fee
A risk assurance charge, which is 5% on every dollar drawn down on the loan
Some loans also require a security fee, if caveats are required for the security of the loan, these fees are $980 for caveats and $1300 for mortgages
Each of these fees is capitalised to the loan, so you only pay them once you begin making repayments.
To find the true cost of a loan, you can combine the costs of these fees with the interest rate of the loan. As long as you are comparing the same loan terms and amount, a comparison rate helps you to compare the cost of different loans.
At Plenti, typical borrowers incur effective costs of about 11% p.a.
Now that you understand the building blocks of a legal fee loan, you’ll be better able to decide which loan suits you. Planning and considering your situation upfront will help when comparing what green loan products are available that might really fit your needs, and offer the best value.