Structured Settlement Loans: Right For You?

A structured settlement loan provides individuals the opportunity to receive a lump sum payment upfront in exchange for their future structured settlement payments. Structured settlements are often awarded in personal injury cases and involve periodic, tax-free payments over a set period. These payments are funded by an annuity purchased by the defendant or their insurer.

How Structured Settlement Loans Work

When you take out a structured settlement loan, a factoring company buys the rights to your future settlement payments. In return, you receive a lump sum of money upfront. The factoring company then collects the future payments from the annuity. Here's a detailed breakdown:

Application Process: You begin by applying for a structured settlement loan with a factoring company. This process usually involves providing details about your settlement, including the total amount and the schedule of future payments.
Evaluation: The factoring company evaluates your settlement to determine how much they are willing to offer you as a lump sum. This evaluation considers the total value of your future payments and the risk associated with receiving those payments.
Offer and Agreement: If you agree to the terms offered by the factoring company, you sign a contract that transfers the rights to your future payments to them. This contract is legally binding and outlines the amount you will receive upfront and the terms of the transfer.
Court Approval: In many jurisdictions, selling structured settlement payments requires court approval. This step is intended to protect your interests and ensure that the transaction is fair and in your best interest. The court will review the terms and may require a hearing where you explain why you need the lump sum.
Lump Sum Payment: Once the agreement is finalized and approved by the court, you receive the lump sum of money. This payment can be used for any purpose, such as paying off debt, medical expenses, or investing in a business.
Future Payments: The factoring company now holds the rights to your future payments. They will collect these payments from the annuity as they are disbursed, effectively recouping their investment over time.

Factors to Consider Before Taking Out a Structured Settlement Loan

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 and no other viable options, a structured settlement loan might be a practical solution. However, exhaust other options first, such as personal loans, before proceeding.

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: Be cautious about selling your future income. If you rely on these payments for ongoing expenses, maintaining them might be crucial for your financial stability.

3. Interest Rates

Consideration: Compare the interest rates and fees associated with the loan to other financing options. Structured settlement loans often have high interest rates and fees that can significantly reduce the lump sum you receive.
Recommendation: Shop around and compare offers from different factoring companies. Choose the option with the most favorable terms, keeping in mind the total cost of the loan.

4. Financial Discipline

Consideration: Evaluate 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, a lump sum might be advantageous for investing or major expenses. If not, sticking with periodic payments might be safer.

5. Court Approval

Consideration: Understand that the loan process may require court approval, which can take time and involve legal fees. The court's role is to ensure that the sale is in your best interest.
Recommendation: Be prepared for the court approval process and any associated delays. Ensure you have a compelling reason for needing the lump sum and be ready to present it to the court.

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 expect inflation to rise, a lump sum might be more beneficial. You can invest the lump sum to potentially outpace inflation and preserve your purchasing power.

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.

8. Alternative Options

Consideration: Explore other financial options, such as personal loans, credit lines, or even negotiating an advance from your employer. These options might meet your needs without selling your settlement.
Recommendation: Evaluate all alternative options and choose the one that offers the best terms and least financial impact. A structured settlement loan should be a last resort.

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.

10. Professional Advice

Consideration: Seek advice from a financial advisor or attorney to understand the full implications of taking out a structured settlement loan. 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.

Conclusion

Taking out a structured settlement loan is a major financial decision that requires careful consideration. It's essential to weigh the immediate benefits against the long-term impact on your financial stability. Consulting with a financial professional can provide valuable insights and help you make the best choice for your situation. If you have an urgent need for funds and no other viable options, a structured settlement loan 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 an informed decision that aligns with your financial goals and needs.