Structured Settlement Cash Advance vs. Loan: Which Is Better?

When you're considering accessing funds from your structured settlement, you have two main options: structured settlement cash advances and structured settlement loans. Both options allow you to receive a lump sum of money upfront, but they come with different terms and implications. Let's break down the key differences and factors to consider.

Structured Settlement Cash Advances

A structured settlement cash advance involves selling a portion of your future settlement payments to a factoring company in exchange for a lump sum of money. Here's how it works:

Application: You apply to a factoring company, providing details about your structured settlement.
Evaluation: The factoring company evaluates your settlement and determines the lump sum they are willing to offer.
Agreement: If you agree to the terms, you sign a contract transferring the rights to your future payments to the factoring company.
Lump Sum Payment: You receive the lump sum of money upfront.
Future Payments: The factoring company collects the future payments from the annuity.

Structured Settlement Loans

A structured settlement loan is a loan secured by your future settlement payments. Here's how it works:

Application: You apply for a loan with a lender, using your structured settlement as collateral.
Evaluation: The lender evaluates your settlement and determines the loan amount they are willing to offer.
Agreement: If you agree to the terms, you sign a loan agreement, which includes repayment terms and interest rates.
Lump Sum Payment: You receive the lump sum of money upfront.
Repayment: You repay the loan over time, typically with interest, using your future settlement payments.

Key Differences

Ownership of Payments: With a cash advance, you transfer ownership of your future payments to the factoring company. With a loan, you retain ownership but use the payments as collateral.
Court Approval: Cash advances often require court approval, while loans may not.
Interest Rates: Cash advances typically have higher interest rates and fees compared to traditional loans.
Flexibility: Loans may offer more flexibility in terms of repayment options and interest rates.
Impact on Future Income: Both options reduce your future income, but cash advances may result in a larger reduction due to the transfer of ownership.

Key Factors to Consider

1. Need for Immediate Funds

Consideration: Assess whether you have an urgent need for cash that cannot be met through other means. Immediate needs might include medical expenses, debt repayment, or significant financial obligations. Recommendation: If you have pressing financial needs that cannot be addressed through other means, consider a structured settlement loan or cash advance. However, explore all other available options first, such as personal loans, credit lines, or financial assistance programs, to ensure you're not prematurely diminishing your future income.

2. Loss of Future Income

Consideration: Think about the long-term impact of losing your periodic payments. These payments provide a steady income stream that can help with budgeting and financial planning. Recommendation: If you rely on these payments for ongoing expenses, be extremely cautious about selling them. Calculate how much you will lose in future payments versus the immediate benefit of the lump sum. Maintain the structured settlement if it is crucial for your long-term financial stability.

3. Interest Rates

Consideration: Compare the interest rates and fees associated with both options. Structured settlement loans often have lower rates compared to cash advances. Recommendation: Shop around and get quotes from multiple factoring companies and lenders. Choose the option with the most favorable terms. If you find that the interest rates and fees are excessively high, it might be better to explore alternative financing options.

4. Financial Discipline

Consideration: Assess your ability to manage a lump sum responsibly versus receiving periodic payments. A lump sum can be quickly depleted if not managed wisely. Recommendation: If you have a history of financial discipline and a concrete plan for the lump sum (e.g., investing it, paying off high-interest debt), a structured settlement loan might be beneficial. If not, stick with the periodic payments to ensure a steady income stream.

5. Court Approval

Consideration: Understand that cash advances often require court approval, which can be time-consuming and involve legal fees. Loans may not require court approval. Recommendation: Be prepared for the court approval process if you opt for a cash advance. Have a clear and compelling reason for needing the lump sum, and be ready to present it to the court. If you prefer a faster process, consider a loan that doesn't require court approval.

6. Inflation

Consideration: Consider how inflation might affect the purchasing power of your future payments versus the lump sum. Periodic payments might lose value over time due to inflation. Recommendation: If you anticipate high inflation rates, a lump sum might be more advantageous, as you can invest it to potentially outpace inflation. However, ensure that you have a solid investment plan in place to make the most of the lump sum.

7. Tax Implications

Consideration: Verify any potential tax consequences of receiving a lump sum versus periodic payments. Structured settlements are often tax-free, while a lump sum might be subject to taxes. Recommendation: Consult with a tax advisor to understand the tax implications of selling your settlement. Ensure that you are making an informed decision based on your tax situation. If the lump sum is likely to incur significant taxes, it might be better to retain the structured settlement.

8. Alternative Options

Consideration: Explore other financial options, such as personal loans or credit lines, that might meet your needs without selling your settlement. Recommendation: Exhaust all alternative financing options before considering a structured settlement loan or cash advance. Personal loans, home equity lines of credit, and other financial products might offer more favorable terms and preserve your future income.

9. Long-Term Goals

Consideration: Reflect on your long-term financial goals and how selling your settlement might align or conflict with them. Consider the impact on your future financial plans and stability. Recommendation: Align your decision with your long-term goals. If selling your settlement helps achieve a major financial milestone or investment, it might be worth it. Otherwise, maintaining the payments might be wiser to ensure long-term financial security.

10. Professional Advice

Consideration: Seek advice from a financial advisor or attorney to understand the full implications of taking out a structured settlement loan or cash advance. They can help you weigh the pros and cons and make an informed decision. Recommendation: Always consult with a financial professional before making a major financial decision. Their expertise can provide valuable insights and ensure that you are fully informed. They can help you evaluate your options and choose the best path forward.

Conclusion

Taking out a structured settlement loan or cash advance is a major financial decision that requires careful consideration. By evaluating each factor and seeking professional advice, you can make an informed decision that aligns with your financial needs and goals. If you have an urgent need for funds and no other viable options, a structured settlement loan or cash advance might be a practical solution. However, be cautious about the potential loss of future income, high interest rates, and the court approval process. Consider all factors and make a decision that ensures your long-term financial stability.