Compounding
Compounding is when charges are calculated on a balance that already includes previous charges, so the amount owed grows on itself over time.
It is the single most damaging term in a funding agreement. A monthly compounding rate that sounds small can produce a payoff figure exceeding the value of the case on a file that runs two or three years.
A simple charge is the alternative: every charge is calculated on the original amount advanced and the balance never earns on itself. Get Lit Money's charges are simple, stepped every six months.
Ask directly whether charges compound, and ask for the payoff at twenty-four months in writing. The second question answers the first.
Related terms
- Simple (non-compounding) charge — A simple charge — what a lender would call simple interest — is calculated only on the original amount advanced, never on accumulated charges, so the balance does not grow on itself.
- Cap — A cap is a hard ceiling on the total amount repayable on an advance, expressed as a multiple of the amount advanced — beyond which the balance stops growing regardless of how long the case runs.
- Buyout — A buyout is when one funding company pays off a claimant's existing advance with another company and replaces it with its own agreement, usually on better terms.
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