Structured Settlement Loan

A structured settlement loan is a financial product intended to turn a future stream of cash flows into an immediate payment. Structured settlements are generally awarded in court by a judge and jury who decide on a reasonable amount to pay a plaintiff for their injuries, or damages. This settlement is usually paid for over the course of weeks, months, or years, in small, routine amounts.

Unfortunately, the high cost of going to court coupled with the amount of time it takes to get a case to a decision means many people run out of money waiting for the court case to settle, or build up large debts. By then, a structured settlement is too little, too late since the amounts aren’t enough to take care of an immediate cash crunch. In order to make good on their finances, many courtroom winners seek out a structured settlement loan to receive their money as soon as possible. With a structured settlement loan, the full amount of the courtroom decision can be received instantly, less any fees and interest.

How it works
A structured settlement loan is a loan in the sense that the lender accepts the future payments from the other party, and delivers to you an immediate amount of cash. Generally, the immediate cash is paid in a sizeable lot, but in an amount still only a fraction of the actual winnings. We’ll explain the exact process below.

For example:
Sally wins a $500,000 case, where she is paid $25,000 per year for the next 20 years. She doesn’t want this revenue stream, and she decides that by seeking out a structured settlement loan, she can better use the money now, rather than in the future.

The structured settlement company evaluates the case, the winnings, and the company responsible for making the annual payments (usually an insurance company) and determines the rate of return it needs to generate on its investment (your loan.) The structured settlement company can then determine how much they can pay Sally and still make a profit for themselves. We’ll show a model based on a 5%, 8%, and 10% annual return:

If the structured settlement loan company wants a 5% annual return on their investment then they would pay $311,555.26 against 20 years’ worth of $25,000 payments. At 8%, that amount drops to $245,453.69, and at 10%, the structured settlement company is willing to pay only $212,839.09. You can calculate these amounts at different rates by searching for a “present value of an annuity” calculator, which will calculate what a future series of cash flow is at present after a discount rate is applied.

When it makes sense, and when it doesn't
As a general rule of thumb, a structured settlement loan makes sense only if the perceived cost of the loan is less than the perceived benefit. Generally, this can be assessed easily by evaluating whether or not you can generate a return greater than the discount rate on your money.

For example: lotteries often allow for winners to receive either a stream of cash flows over 20 years, or an immediate, lump sum payout. Ordinarily, the lump sum payout is made with a discount rate equal to the rate of return on state government investment bonds. If you believe that you can beat the return of state or federal bonds (corporate debt easily outperforms government debt) then it makes sense to take the lump sum option. However, if the discount rate is higher than the risk-free rate of return, then it makes very little sense to take the structured settlement loan, since your own rate of return isn’t greater than the rate of return on the structured settlement contract.