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Legal fees can get expensive. Whether you need to hire an attorney for a divorce case, to represent you against criminal charges, or to guide you through the adoption process, the cost can be prohibitive — but that doesn’t mean you should move forward without legal counsel.

Instead, there are a few different ways to pay for a lawyer, including personal loans. We’ll review how to get a loan for legal fees, as well as other options available to you.

What Are Loans for Legal Fees?

While you cannot find a loan designed specifically for legal fees, you can take out a personal loan to cover your legal costs. If your lawyer mentions taking out a loan for payment, they’re likely referring to a personal loan.

How Do Loans for Legal Fees Work?

Personal loans for legal fees work much like how a personal loan works typically. Personal loan rates and terms vary by financial institution. In general, the longer the loan term, the higher your annual percentage rate (APR) will be, but because the repayment is spread out over more years, the monthly payments will be lower. Generally, personal loan terms range between one and seven years.

When you get a personal loan for legal fees, you’ll get the lump sum from the lending institution to pay your lawyer. Some banks offer same-day funding. Then, rather than owing the lawyer, you’ll owe the lender until the loan is paid off in full.

Keep in mind that, in addition to interest, some personal loans include origination fees and prepayment penalties.

Typical Legal Loan Requirements

When you go to apply, the lender may have a few personal loan requirements that you’ll have to meet. These may vary by financial institution.

Credit Score

A key factor in getting approved for a legal loan is your credit score. In general, the higher your credit score, the better your chances of approval (and at a lower interest rate, which means lower personal loan rates).

The credit score you need for a personal loan will vary by institution. Some lenders may even grant personal loans to borrowers with bad credit. In those cases, fees and APRs are typically very high.

Speaking of your credit score, most lenders offer soft pulls for personal loans to see if you’re qualified. But once you apply, expect a hard inquiry on your credit report, which will temporarily lower your score.

Debt-to-Income Ratio

Lenders also factor in your debt-to-income (DTI) ratio when considering your loan application. Your DTI ratio is the total amount of your monthly debts (think car payment, student loan payments, credit card bills, mortgage, etc.) divided by your monthly income.

The lower your DTI ratio, the better your chances of getting approved for a personal loan for legal fees with favorable rates and terms.

Proof of Income and Employment

To get a legal fee loan, you’ll need to demonstrate your ability to repay it to the lender. That means that lenders often want to see proof of income and employment, such as a signed letter from your employer, pay stubs, and/or W-2 forms.

Self-employed and need a personal loan? You’re not out of luck. Lenders may just want to see your tax returns and/or bank deposit info.

Origination Fees

Some lenders charge a loan origination fee when you take out a personal loan. This is a one-time fee at the start of the loan that covers the administrative costs of processing the loan. (If you’ve ever bought a house, you likely paid a mortgage origination fee as part of your closing costs.)

Personal loan origination fees might be flat fees or a percentage of the loan amount. Not every lender charges these fees.

Collateral

Loans for legal fees are usually unsecured personal loans, meaning they’re not backed by any collateral. Other examples of unsecured loans are traditional credit cards and student loans, where you can borrow money without putting up assets as collateral. Because there’s no collateral, fees and interest rates tend to be higher.

That being said, personal loans can be secured in some instances, meaning you’d have to put up some kind of collateral, like a car or house. Secured personal loans may have lower fees and interest rates, but costs vary by lender.

If you get a secured personal loan for your legal fees, you’ll need to offer some kind of collateral to the lender.

Pros and Cons of Using a Loan to Cover the Cost of Legal Fees

Thinking about using a personal loan to cover legal fees? Here are the pros and cons to consider:

Pros of Legal Fee Loans	Cons of Legal Fee Loans
You get access to the legal help you need, even if you can’t afford it right now.	You’ll pay more over time because of interest and fees.
Personal loans for legal fees may be cheaper in the long run than paying with a credit card.	Interest rates are typically high if you have bad credit.
You can often get same-day funding.	Your budget will be strained with another monthly payment to manage for several years.
Unlike credit card APRs, personal loan interest rates are usually fixed; you can count on the same monthly payment until it’s paid off.	Missing a payment can have financial consequences.
Unsecured loans don’t require collateral, so you don’t have to put your house or car at risk.	You may be overlooking cheaper alternatives, like a payment plan through the law office or crowdfunding online.

How Legal Fees Are Billed

Legal fees can run the gamut. Your attorney may charge you several types of fees during the course of their representation. Here’s a quick look at some of the fees you might incur when hiring a lawyer:

•   Hourly fees: A lawyer will likely charge you by the hour for their services — and that’s not just the hours you spend consulting with them. Lawyers do a lot of work on your case behind the scenes, and they’ll bill you for every one. Hourly rates can range from as little as $50 to $100 an hour to as much as several thousand dollars an hour, depending on the lawyer’s experience, the complexity of the case, and geographic location. The average hourly rate for a lawyer in 2022 was $313, according to the Clio 2022 Legal Trends Report.

•   Flat rates: Sometimes, a lawyer might charge you a simple fixed fee for a specific service. This is typically for less involved work (i.e., no court representation). For instance, they may charge a set rate to prepare your will or help you with a real estate transaction, bankruptcy filing, or uncontested divorce.

•   Contingency fees: As the name implies, these fees are contingent. You’ll only pay them if you win your case and are awarded a monetary sum. Often, a lawyer’s contingency fees are a percentage of that sum.

•   Litigation fees: Your lawyer may include this as a line item on your invoice, but really, it’s a catch-all for several fees. These include court filing fees, attorney’s fees, expert witness fees, fees for re-creating an accident or accessing records, copy fees, and others.

Recommended: The Cost of a Divorce

Alternatives to Legal Loans

A legal loan is not your only option for covering legal fees. If you don’t want to take out a personal loan or don’t qualify, consider these other options. Just make sure to steer clear of predatory lending.

Credit Cards

Many lawyers accept credit cards as a payment method for their services. If that’s your preferred payment method, ask a lawyer if they accept credit card payments. If they say no, keep looking for a different option.

Just keep in mind that credit cards may have higher interest rates than a personal loan. Check your credit card’s APR to calculate how much you might owe in interest if you don’t pay off your credit card balance quickly.

Legal Payment Plans

Some law offices may offer payment plans to their clients. In this case, you would pay your lawyer in monthly installments rather than in one lump sum.

While not every lawyer offers this option, it never hurts to ask. This is another question you can ask upfront before hiring a lawyer.

Crowdfunding

Asking friends and family for financial help is never easy, but loved ones may chip in if you’re in a bind.

Alternatively, you can seek a wider net of potential benefactors by crowdfunding on social media or using official crowdfund platforms. Just keep in mind that such platforms often keep a percentage of the funds as payment.

Taking Out a Personal Loan With SoFi

Paying for costly legal fees with a personal loan can ease the process and make legal counsel more accessible, whether you’re adopting a child, getting a divorce, fighting criminal charges, or suing a person or business as a victim. SoFi offers personal loans at competitive rates.

Tackle your legal fees with a personal loan from SoFi.

FAQ

Is it legal to take out a loan for legal fees?

Yes, it is legal to take out a loan for legal fees. Legal funding loans are simply personal loans that you take out with a lender to cover the cost of hiring a lawyer.

Can legal fees be tax deductible?

If you’re a business owner who incurs legal fees for your business, you can deduct the cost on your taxes. This applies to property owners who incur legal fees when renting out their property to tenants. In addition, legal fees related to adopting a child are tax-deductible through the federal adoption tax credit.

Can legal fees be paid in installments?

Many law firms offer payment plans to their clients that allow them to make payments in installments. If your lawyer doesn’t offer this and you can’t pay out of pocket, you can also look for a legal finance loan (a personal loan) to cover the cost. While you’ll pay the lawyer in a lump sum, you’ll pay off the loan in installments.

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Photo credit: iStock/Andrii Yalanskyi

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Net income (NI), or net earnings, is the amount of money a company has left after subtracting operating expenses from revenue. Retained earnings goes a step further, subtracting dividend payouts to shareholders.

Companies have several different types of earnings, each of which provide different information about their revenues and insight into their financial health. On a company’s balance sheet — which is a key piece of information in evaluating a company’s stock value — it will report details about its expenses and earnings, including retained earnings and net income.

What Is Net Income?

Net income (NI) is an indication of how profitable a company is. It is a basic calculation showing the difference between its earnings and expenses, which can include labor, marketing, depreciation, interest, taxes, operational expenses, and the cost of making products.

How to Calculate Net Income

The net income formula below can be used to calculate the net income of a company:

Net Income = Revenue – Expenses

For example, if a company makes $50,000 in revenue during an accounting period and has $30,000 in expenses, their net income is $20,000.

Understanding Net Income

Net income is often referred to as the bottom line, since it appears on the bottom line of a company’s balance sheet and is the basic calculation of a company’s profit.

NI is used when calculating earnings per share, and is one of the key figures investors use when evaluating companies. When people talk about a company being in the red or in the black, they are referring to whether the company has a positive or negative net income.

It’s important to note that net income can be manipulated through the hiding of expenses and other means. It can be hard to figure out if this is happening, but investors might want to be wary of this and look into what numbers are being used in the net income calculation, and a good time to do so may be around a company’s earnings call.


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What Are Retained Earnings?

Retained earnings (RE) may also be referred to as unappropriated profit, uncovered loss, member capital, earnings surplus, or accumulated earnings.

Profitable companies try to strike a balance between reinvesting in their business and paying out dividends to please shareholders. After a company completes dividend payouts, they retain the amount of earnings that are left, and may decide to reinvest them into the business to continue to grow, pay off loans, or pay additional dividends.

It’s useful to understand RE when looking into companies to invest in, because they show whether a company is profitable or if all of their earnings are going towards dividends. If a company’s retained earnings are positive, this means they have money available to invest and put towards growth.

On the other hand, if a company has negative retained earnings, it means they are in debt, which is generally not a good sign.

How to Calculate Retained Earnings

Use the following formula to calculate the retained earnings of a company:

Retained earnings = Beginning retained earnings + Net income or loss – Dividends paid (cash and stock)

All of this information is available on a company’s balance sheet. In order to find beginning retained earnings one will need to look at the previous period’s balance sheet.

For example, if a company starts with $8,000 in retained earnings from the previous accounting period, these are the beginning retained earnings for the calculation. If the company makes $5,000 in net income and pays out $2,000 in dividends to shareholders, the calculation would be:

$8,000 + $5,000 – $2,000 = $11,000 in retained earnings for this accounting period. Since retained earnings carry over into each new accounting period, profitable companies generally have increasing retained earnings over time, unless they decide to spend them.

Understanding Retained Earnings

The calculated retained earnings show a company’s profit after they have paid out dividends to shareholders. If the calculation shows positive retained earnings, this means the company was profitable during the specified period of time. If the retained earnings are negative, this means the company has more debt than earnings.

Companies can use this figure to help decide how much to pay out in dividends and how much they have available to reinvest.

Although negative RI isn’t ideal, investors should consider the company’s individual circumstances when evaluating the results of the calculation. There are some instances in which negative retained earnings are fairly normal and not necessarily a reason to avoid investing.

How To Assess Retained Earnings

When assessing the retained earnings of a company, the following factors should be taken into account:

•   The company’s age. If a company is only a few years old, it may be normal for it to have low or even negative retained earnings, since it must make capital investments in order to build the business before it has made many sales. Older companies tend to have higher retained earnings. If a company has been around for many years and has low or negative retained earnings, this may indicate that the company is in financial trouble.

•   The company’s dividend policy. Some companies don’t pay out any dividends, while others regularly pay out high dividends. This will affect their retained earnings. In general, publicly-held companies tend to pay out more dividends than privately-held companies.

•   The period of time used in the calculation. Some companies are more profitable at certain times of year, such as retail businesses. If one looks at retained earnings during the holiday season or other popular times for retail, the company may save up their profits from those times in order to get through slower times. For this reason, the same company might show different retained earnings depending on what time period is used in the calculation.

•   The company’s profitability. More profitable companies tend to have higher retained earnings.

What’s the Difference Between Retained Earnings and Net Income?

Although retained earnings and net income are related, they are not the same.

Similarities

Both metrics help investors understand a company’s profitability, which is a chief similarity. They’re both calculated in similar ways, too, though obviously, calculating retained earnings requires some extra steps. Net income also has a direct impact on retained earnings.

Differences

There are differences to keep in mind. For one, you may not find retained earnings on a company’s income statement, and calculating retained earnings will differ from company to company as not all firms pay out the same dividends.

Note, too, that while net income helps with understanding profit, retained earnings help with understanding both profit and growth over time.

Example of Retained Earnings vs Net Income Differences

At times, a company may have negative retained earnings but positive net income — providing a good example of the difference between the two. This is what is known as an accumulated deficit. Or the opposite may occur. For example, if a company earned $60,000 in revenue and they have $40,000 in expenses, their net income is $20,000. If they then pay out $10,000 in dividends to shareholders, the retained earnings calculation would be:

$0 + $20,000 – $10,000 = $10,000 in retained earnings

If a company has a healthy net income and retained earnings, this may be a good time for them to reinvest some of their money into growing the business. In some cases, retained earnings and net income may be the same — as when a company doesn’t pay out dividends and has no retained earnings carried over from the previous period.


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Why Do Retained Earnings and Net Income Matter?

Investors are often interested in retained earnings and net income because they help show the long-term financial health of a company. Figures such as revenue and expenses vary with each accounting period, and they don’t give as accurate a picture of debt and opportunity for growth.

Understanding how much profit a company really has after dividend payouts and expenses can better help investors assess the risk and opportunity involved with investing in a company. Since RI carry over into each new accounting period, they show how much a company has saved, earned, and spent over time. (Another calculation used for evaluating a company’s profitability and debt is the debt-to-equity ratio, which is a measure of how much debt it takes for a company to run its business.)

Retained earnings are also useful for companies to help determine how to spend their money. If retained earnings and/or net income are low, it might be best for the company to save their money rather than reinvesting it or paying out dividends. If the numbers are high, they can consider spending it.

The Takeaway

Net income and retained earnings are two useful calculations that can help investors assess a company’s health, and that can help a company decide what to do with their earnings. They’re a key part of a company’s overall financial picture.

The big difference between the two figures is that while net income looks at revenue minus operating expenses, retained earnings further deducts dividend payouts from NI. Both can help form an overall view of the profitability and risk of a company.

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FAQ

Should retained earnings be higher than net income?

No, because retained earnings are derived from net income. Net income is a larger number, and retained earnings are calculated from net income.

Does retained earnings mean net income?

No, the two are similar metrics, but not the same. Net income is a company’s revenue minus expenses, and retained earnings incorporate expenses and dividends paid out.

How does net income flow to retained earnings?

Broadly speaking, retained earnings are the remainder of net income after the amount of dividends paid out to shareholders has been factored into the equation.

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