Structured settlement loans can be useful for individuals in receipt of a personal injury annuity when they find themselves needing some extra money and have few other options to obtain it.
A structured settlement loan is different from selling your annuity altogether, as it involves borrowing a sum of money against the future payments you are scheduled to receive.
These payments are then used to repay the loan when you receive them
Many people choose to take out a loan rather than sell the whole annuity as they don’t want to give up all of their future entitlement and hence, their future financial security.
You can take out a loan on your settlement at any time – there are even a few companies that will let you borrow against a settlement that hasn’t been certified in court yet.
However, there are a number of downsides to structured settlement loans, and these need to be considered very carefully.
One of the biggest negatives about structured settlement loans is the tax issue.
While your regular payments are non-taxable, you will unfortunately have to pay tax on the lump sum you receive from the loan company, at whatever the current rates are for your state.
Note that it’s not just income tax you need to pay. You will need to pay self employment tax on your loan as well – because Medicare and social security is not being withheld from your income.
Make sure you are aware of all of your tax responsibilities before coming to a final decision about borrowing against your structured settlement. It may be worth talking to a financial adviser who can explain all of the issues to you.
The other big negative, as with any other kind of loan, is that you will ultimately lose money on the deal. When borrowing against a structured settlement for cash, the lender will be entitled to receive an agreed-upon portion of all of your future structured settlement payouts, and this will amount to significantly more than the loan amount.
Typically, lenders will absorb around 20% to 30% of the settlement’s value, on top of the repayments you have to make. Therefore, you really need to consider if your urgent need for money is worth the ultimate loss you will have to take.
Structured settlement loans – Worth it or not?
After reviewing all of the above, you might be forgiven for thinking that it’s not worth borrowing against any structured settlement payment, but there are a number of advantages too.
Firstly, pre-settlement loans, despite their higher rates, are not your responsibility should you fail to win your case.
Second, if you are taking a loan to protect certain assets like your home or a car, then you may consider that the benefits of this outweigh the costs you have to pay.
One final advantage of taking a loan out on your structured settlement is that it does not matter what your credit history looks like.
Your ability to pay back the loan is judged by the value of your structured settlement, as opposed to being judged by your current income and any debts you may have.