If you receive ongoing settlement payments over many years, you may look into getting upfront cash by borrowing against future structured settlement payments. But turning long-term funding into immediate money comes with steep interest rates and fees.

What is a Structured Settlement?

Before understanding settlement loans, it helps to know what a structured settlement entails. A structured settlement provides compensation for injury victims through scheduled periodic payments over 5, 10, 20+ years or even a lifetime instead of one lump sum.

Structured settlements are commonly used to resolve major personal injury claims from:

  • Car, truck and motorcycle collisions
  • Medical malpractice
  • Defective products
  • Workplace accidents leading to long-term disabilities

Benefits often include:

  • Financial security and stability over time
  • Avoid risky investments that could lose principal
  • Payments adjusted for inflation
  • Certain tax advantages

But the lack of access to total funds upfront leads some structured settlement recipients to seek loans leveraging those future payments for immediate spending money.

What is a Structured Settlement Loan?

A structured settlement loan uses your scheduled future payments to borrow money now. Financial companies provide cash upfront in exchange for redirecting all or part of your forthcoming structured settlement funds as repayment.

Other common names for structured settlement loans:

  • Structured settlement factoring
  • Settlement purchase agreements
  • Secondary market annuity (SMA)

While you get money instantly, it severely impacts the financial benefits structured settlements aim to provide. You lose future guaranteed income meant to protect long-term wellbeing.

How Do Settlement Loans Against Structured Payments Work?

Getting a cash advance against structured settlement payments follows these main steps:

  1. Estimate your remaining total structured settlement based on number and size of payments still owed. Submit details to lender for loan evaluation.
  2. Loan company determines size of cash advance to offer based on estimated future settlement totals.
  3. Upon accepting loan/sale terms, complete required legal process to reassign your rights to certain settlement payments to new financial institution now buying the payments.
  4. Cash is sent to you directly and structured settlement administrator begins making assigned payments to the purchasing company. Those payments no longer go to you until reassigned ones are fulfilled.
  5. You immediately repay loan (plus very high fees/interest) using funds previously designated to provide long-term financial security.

Benefits of Turning Structured Settlements into Cash Now

Just like with pre-settlement loans for pending cases, the biggest reason people borrow against structured settlements is getting quick access to large lump sums.

Potential financial benefits include:

  • Pay off other debts carried at higher rates
  • Fund major purchases immediately instead of gradually
  • Leverage future payments for present needs due to changed life circumstances
  • Invest bulk amount for chance of returns exceeding settlement loan costs

Despite these possible upsides, huge risks and almost guaranteed excessive consumer costs make proceeding very precarious.

Risks and Drawbacks of Structured Settlement Loans

Turning guaranteed future income into immediate dollars compromises core benefits structured settlements aim to deliver.

Loss of Long-Term Security Blanket

  • Forfeits reliable income funding retirement, ongoing medical costs or living expenses
  • Requires extreme financial discipline investing lump sum to replicate original benefits

Steep Fees and Above-Market Rates

  • Hefty origination charges just to get loan approval
  • Prices equivalent to extremely high financing costs

Tax Implications

  • Immediate payment could move recipients into higher tax bracket
  • Jeopardizes certain settlement tax exemptions

Settlement Payment Reductions

  • Smaller monthly payments after lender takes assigned portion
  • Total remaining lifetime amount diminished

Alternatives to Explore Before Structured Settlement Loans

Better options likely exist besides essentially selling off future settlement payments. Analyze if any fit your situation before resorting to massive penalty loans:

  • Wait before making big-ticket purchases if possible
  • Save gradually from ongoing payments without borrowing
  • Discuss payment schedule changes with settlement administrator
  • Set up low/no fee payment plan for needed medical equipment
  • Explore lower cost financing for urgent expenses
  • Learn revised budgeting from financial advisors

Cost Example – Factoring Structured Settlement Payments

Estimating total charges for turning future income into immediate cash is tricky with many variables affecting rates. But here’s a hypothetical cost scenario:

Remaining Settlement: $250,000
Payments Owed Over 10 Years

Cash Advance Sought: $100,000

Lender Buys Equal Payments = $10,000/Year x 5 Years

Fee/RateTotal Charge
Origination Fee$2,000
Service Fees$500
Interest Charges$7,500 fixed rate of 7.5% APR
Total Loan Costs__$10,000

To get $100,000 now, you repay $110,000 over 5 years by signing over $10,000 per year originally headed to you.

So while structured settlement loans provide instant money, you see only a portion of your future compensation while still owing decade(s) of payments now redirected to the lending institution. Evaluate if the short-term gain merits compromising income stability.

Key Question – Are Settlement Payment Loans Worth It?

Before borrowing against structured settlements supposedly offering reliable lifelong finances, ask yourself:

Is getting some money now worth permanently losing a significant portion of future payments designed to provide long-term safety net?

Your answer involves weighing present urgent needs against reassurance from ongoing income over many years. It requires honestly assessing if you can appropriately manage, budget, and invest the immediate lump sum to replicate lost future compensation.

For those falling behind on important bills or medical costs, structured settlement loans may help catch up and start fresh. But relying on them too much equates living paycheck-to-paycheck rather than following the intent of originally structured periodic payment. Get sound professional advice weighing loan consequences against your full financial situation before deciding.

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