Yesterday I received a call from an 18 year old reader whose mother and guardian agreed to a structured settlement, several years ago, as part of the resolution of the now 18 year old''s personal injury case. The 18 year old, aware that her mother wanted to spread out her payments as a spendthift protection measure, had just received the first of several annual payments and was curious about selling one or more of her remaining payments. The scenario raises interesting common issues, inspiring this post, which I hope will help other young adults.
We had a long discussion about the reasoning behind her structured settlement. We discussed what happens with a structured settlement factoring transaction, how the payment are discounted and, in some cases the effective discount rate in a structured settlement factoring transaction can exceed the initial rate that one can obtain from credit card issuers**.
If the amount that you are seeking to sell is relatively small, you may be able to obtain a credit card with a low or even 0% interest rate for a year. Thus you may borrow money at nominal cost compared to the "kick in the gut" you might get from the factoring company. A further benefit is that by employing a strategy of borrowing a modest amount and then, paying it back when the annual payment from the structure is due may serve to build credit. A structured settlement factoring transaction in and of itself does nothing for your credit (except maybe help pay a past due bill). A number of credit card issuers are interested in working with new adults. However be responsible and keep your borrowing limits modest so you do not over extend yourself.
Other potential sources of cash that can be obtained cheaper than a structured settlement factoring transaction are policy loans on your cash value life insurance. Most cash value policies allow you to borrow at fixed rates or market rates that are typically better than the effective discount rates chargedby factoring companies. If you have such a policy with a major insurer the turnaround time is likely to be faster as well.
I want to add that I had no hand in the original creation of the caller's structured settlement, nor would I accept any compensation if this 18 year did end up selling her structured settlement payment rights.
** will be highlighted further if factoring companies succeed in raising discount rate caps in states like North Carolina, or in muddying the waters enough so that Allstate or others cease to offer to give their annuitants a rate that forces the factoring industry to compete at an effective discount rate closer to 10 than 20
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