A purchasing company determines how much you will receive for your structured settlement future payment by calculating the present value of the payments that you are selling. They do this by applying a discount factor to the structured settlement future payment. That discount factor is similar to the interest you pay on a loan.
The Math is a Bit Complicated
For an accountant or financial expert, this is a relatively simple calculation. For most people it is a bit confusing, so let’s explain it a bit more. Let’s say that you are currently receiving settlement payments of $1,000 a month and these payments are set to go on for ten years. That is $1,000, twelve times a year, for ten years, for a total of $120,000. So, in the end you will net (get in total) $120,000 if you continue to receive those payments. But you want to sell them for a lump sum of cash now.
When a company buys those payments the company needs to make some money. No company can buy your structured settlement future payment for $120,000 – that makes no sense.
If the company took that $120,000 and put it in an interesting bearing savings account it would earn some money off it, so of course it needs to make some money in this sale. What you care about is how much it makes and how it impacts you.
To determine this amount, the company that is buying your payments will charge a discount factor. As we said, this is similar to a credit card or mortgage company charging you interest on a loan. In short, the company buying your structured settlement will decide what amount of money they need to make on this transaction and deduct that, in percentage points, from your cash sum.
What a Structured Settlement Future Payment Sale Could Cost You
There are reports of less reputable settlement factoring companies buying your structured settlement future payment for a fraction of its real value. Sometimes, the court catches this and rejects the sale, as it did in the case of J.G. Wentworth v. Jenny Arce, when J.G. Wentworth was offering $24,5500 to purchase a total of $63,000 worth of payments. This amounted to the client receiving too little of their original settlement – a discount rate of 20 percent. In this case the court felt that the payment was insufficient and denied the sale. Unfortunately, it is not uncommon in this industry for companies to try to purchase structured settlements at incredible discounts. This is why it is so important that those seeking to sell their settlement work with a company who is experienced, but also caring and honest.
At Strategic Capital we give you a fair and reasonable discount rate on your structured settlement future payment, usually lower than what other companies are willing to offer. At Strategic Capital we do not lowball you! In fact, the cost of selling your settlement to Strategic is often less than the interest charged on a credit card or personal loan.
Getting Your Settlement Funds Today
If you are expecting payments to continue for five or ten years, someone will be prepared to buy that payment. But remember that “today” the buyer will pay you less than the amount of that payment in the future. That is because the buyer needs to be paid “interest” or a “return” for putting up the money “today” and waiting for the payment to come due some time in the future. It’s a logical business arrangement that can benefit everyone involved. But be sure that you work with an ethical company that gives you the proper value for your settlement.