When soliciting bids for your structured settlement, you have probably seen that the amounts being offered as lump-sum purchases for your settlement are substantially less than the total of all the payments that are coming to you. If you’re wondering the reason for the difference, it’s the discount rate.
One way of describing the discount rate is to think of it as an interest rate in reverse. When you borrow money, the lender is charging you interest – an amount over and above the initial loan that you are paying them to compensate for your use of their money. Similarly, the discount rate is the amount that a structured settlement buyer is charging you to give you an advance on your settlement.
While this may seem unfair, think of it from the perspective of the buyer. In order to buy your structured settlement, the buyer has had to amass the lump sum of cash that he will be giving you; if he doesn’t have this cash on hand, he’s had to borrow it from somewhere else. Even if he does have the cash on hand, he is losing interest earnings on that money by giving it to you.
On top of this are the buyer’s operating costs. He probably has an office, with rent and staff that don’t work free. He probably has a few lawyers of his own – and they aren’t free, either. And, of course, he’s not in business to help you – he wants to make a profit.
So what kind of discount rate can you expect to give up when you sell? Well, there is no hard-and-fast rule. Discount rates can often be in the double digits. In 2010 a New York judge questioned one structured settlement agreement that had a discount rate of approximately 20%. You’ll probably have to appear in court to finalize any sale of a structured settlement, but don’t count on the judicial system to determine if a discount rate is reasonable. Once you see the offers you get – and you should always shop your note around to several buyers – you can use online calculators to determine the discount rate you’re being charged. Additionally, when you seek out legal and financial advice for your prospective sale, your advisors should be able to tell you if the discount rate you’re being charged is comparable to other deals they’ve seen recently. If it just seems outrageous – especially if they’re charging you other fees on top of it – it may be time to step back and reconsider whether selling your settlement is your best option.
If you need help selling your structured settlement, annuity or lottery payments,
contact us today. We are here to answer your questions and help you obtain the
highest possible price for your payments.
