Do structured settlement loans exist?
You may see some companies inaccurately advertise a structured settlement loan. But in reality, taking that payment or payments as a lump sum is an entirely different kind of transaction. Instead of borrowing the funds and repaying them with interest, you can instead sell your future payments for a lump sum of cash. The company buys either all your settlement or part of it while charging a discount rate.
In other words, you won’t receive the full remaining value of the structured settlement. But you also don’t have to worry about repaying anything. There’s no interest rate accumulating over time, and you don’t have to worry about a credit check or any other type of loan eligibility criteria.
Here’s why you can’t borrow against your structured settlement
There are several factors that prevent structured settlements from being used as collateral for a loan. The main reason is because there is no way for a bank to seize a structured settlement if you default on the loan. You need physical assets for that, such as real estate, land, or other personal property.
Additionally, the legal requirements surrounding structured settlements make them difficult to transfer. A bank would need court approval, which is unlikely to happen (not to mention burdensome). Structured settlements are also tax-free for the recipient, making it impossible to transfer to a for-profit business like a lender.
Selling structured settlements: How it works
There are several steps to selling a structured settlement. Here’s what to expect if you decide to undergo this type of transaction.
- Decide if you want to sell all your payments or part of them: If you sell all your structured settlement, you won’t receive any other monthly payments once the transaction is completed. Alternatively, you can sell just part of your settlement payments. That consists of selling a percentage of a payment or payments each month for a certain period (such as 50% of your payments for six months). You can also sell a set number of months completely, then resume payments once that period is over (An example would be to sell all payments for one year).
- Collect quotes from multiple companies: Most companies offer free, no-obligation quotes. This lets you compare multiple structured settlement transaction options and pick the one with the lowest fees and best customer service.
- Understand the discount rate: You won’t receive the full value of your structured settlement when you sell it (or part of it). Instead, you’ll receive a reduced amount after the company’s discount rate is deducted. The higher the discount rate, the less money you will receive for your structured settlement.
- Evaluate your offers: In addition to comparing discount rates, do some research to choose a reputable company. Look at online reviews to gauge how other people feel about their experience. Also consider your own experience with the company’s website and customer service team.
- Court approval of transaction: Before finalizing the sale of your structured settlement, you must get approval from the court. The judge will review the transaction terms to make sure the sale is in your best interest. This is a measure of safety that gives you extra confidence that you’re making a good decision. However, it does add time to the overall process. Expect court approval to last anywhere between one and three months.
Pros and cons of selling your structured payments
As you navigate the decision-making process, consider both the benefits and drawbacks of selling some or all your structured settlement.
Pros
- More immediate access to cash instead of waiting years for the entire payout.
- Use funding for things like covering bills, paying off debt, or buying a house.
Cons
- Lose part of the structured settlement due to the discount rate.
- The sale process takes one to three months, making it hard to rely on for short-term financial needs.
- No longer have consistent monthly income.
Can structured settlement payments be used as proof of income?
Whenever you apply for a loan, the lender uses your total income to determine how much you can reasonably pay back (along with your other current debts). You can use your structured settlement payments as proof of income for things like a mortgage, second mortgage, or even an auto loan. Providing your lender with a copy of recent bank statements showing the monthly settlement payments is usually all that is needed.
Of course, if you sell your entire structured settlement, you’ll lose that guarantee of regular monthly income.