Legal fee loans exist to help you level the legal playing field.
A relationship breakdown can be a challenging and confusing time to begin with – and worrying about how to pay for legal advice can make it even harder. With a legal fee loan, you can focus on finding the right advice, without worrying about how to pay for it upfront.
A legal fee loan is a special type of personal loan designed to help you pay for family law matters. It can give you the funds you need to get the right advice from your lawyer and is repaid once a resolution is reached. Unlike a standard personal loan or a credit card, legal fee loans are specially designed to support you through this difficult stage.
Financing for your unique situation
When it comes to most other personal loans, you have to make choices about your loan type. Will it be secured or unsecured? Do you want a fixed or variable interest rate?
Legal fee loans work differently. They’re specifically designed to allow you to borrow what you need, when you need it. Unlike some other loans, you don’t need to draw down the full amount upfront. And you only need to repay the loan once you’ve received your property settlement. Plus, you only pay interest on what you use.
It’s a form of asset-based lending, helping you unlock cash tied up in your assets by securing them against your loan. But that doesn’t mean you have to own real estate – other assets, like funds in trust, may be used in some circumstances.
What can I use the funds for?
If you’re wondering more specifically what a legal fee loan is for, the good news is, it isn’t just a loan for legal fees – it’s there to help you cover all of the costs associated with the legal process.
That can include a wide range of associated third-party costs like:
Accountants to investigate the total value of the asset pool, complicated structures and asset protection schemes
Non-confrontational alternative dispute resolution (ADR) like mediation, arbitration and pre-action procedures
Anything that is connected to the matter can be covered. It can also be used for personal reasons, such as paying for a financial planner or making home improvements prior to putting the property on the market.
How much can I borrow?
With a legal fee loan, you can borrow between $25,000 and $400,000 – usually up to 30% of the expected property settlement. You won’t face any repayments until the division of your property is complete.
A legal loan is a type of personal loan. While the pieces are the same, a legal 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 loan:
Borrowing money helps people access the financial support they need, but it does come at a cost. Like most loans, legal loans need to be paid back with interest. The amount of interest paid on top of the amount borrowed is a percentage of the amount owed. 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 your clients. 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 loans differ. With a standard personal loan, once your clients receive their loan, they need to start paying it back through regularly scheduled repayments, either weekly, fortnightly or monthly.
A legal loan is different. It’s secured against your client's forthcoming property settlement and it’s not expected that they will have the cash to start repaying the loan until they receive this settlement. So, rather than repay the loan in instalments, they'll repay it as a lump sum out of their share of the property settlement once it’s finalised.
Your clients also only access the money when they need it. So if they don’t draw down their entire loan amount, they'll only pay interest on the amount they actually accessed.
The loan amount is the amount of money your clients borrow, plus any fees and charges capitalised into the loan amount. It’s this amount that they'll pay interest on. However, with a legal loan, they only draw down the money as they need it. So they only pay interest on the amount they access.
In Australia, legal loans usually range from $25,000-$400,000.
When your clients take out a standard personal loan, they agree to the length of time it will take them to repay the loan. For personal loans, where they also commit to making regular repayments, lenders usually offer loan terms between 1 and 7 years.
With a legal loan, however, your clients are only expected to repay the loan once their property settles. So the loan term for legal loans allows for this process to happen – typically up to 2 years. If their 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 the 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 they are paid back with the remainder of the loan. This increases the total loan amount, meaning your clients will be paying interest on those fees as well for the life of their 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 the 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 the loan. In general, the lower the fees, the better. But as always, the total cost of the loan should be considered including all interest payable and other charges.
With a legal loan, your clients will still be charged a monthly fee, but it will also be capitalised into the loan, so they pay it at settlement.
Missed payment or ‘default’ fees are the most common penalty fee for personal loans. They’re a more relevant risk when your clients are repaying their 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 loan, your clients are not required to make monthly repayments, so they're at less risk of defaulting. If their settlement hasn’t come through by the end of your loan term, an extension might be possible.
How much does it cost?
To work out the overall cost of legal fee loans, your clients need to factor in:
1. Loan Interest Rates: The biggest factor in how much a legal loan will cost is the rate of interest your clients will pay on the amount borrowed. Legal loans can come with variable or fixed interest rates. If your clients 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 your clients have a comfortable buffer in the event things change. At Plenti, our legal 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 your clients won’t actually pay the fee upfront, rather, it will be added to their 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 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 your clients only pay them once they 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 loan, you’ll be better able to decide which loan is suitable for your clients. Planning and considering their situation upfront will help when comparing what loan products are available that might really fit your clients needs, and offer the best value.
A legal fee loan isn’t right for everyone or every situation. Legal fee loans are ideal for those in situations where a clear settlement outcome is expected. In cases where there’s no clear expected outcome, or where clients are simply hoping for a positive outcome, a legal fee loan is generally not approved.
Legal fee loans cannot be used by people involved with disputes concerning only parenting matters. However, if you have a property settlement matter as well as a parenting matter, you may still be eligible.
There are a few general requirements you must meet in order to qualify:
You must be involved with a family law matter
There must be a property settlement component and a clear entitlement to some property division under the Family Law Act
You must be able to provide some form of security against the loan
You must be an Australian resident, with the majority of your assets in Australia
Keep in mind, Plenti is not an unsecured lender for family law loans. Our loans are usually secured against a house or property. In some instances, security may be difficult to obtain, as funds might be in a lawyer’s trust account, however, this is generally not an issue. In cases where there is no security available at all, a legal fee loan is unlikely to be approved. Plenti’s dedicated team will always work with your lawyer to explore all options that may be available.