If you’ve decided to sell your structured settlement for a lump sum, you’ve hopefully shopped it around to several buyers (if you haven’t, QMAP offers a fast and easy way to do this – try it now!). You may have noticed that the amounts being offered you are less than the total of your settlement. Why so much less?
The answer is simple: the discount rate.
A discount rate is a percentage that a buyer of a structured settlement uses to figure how much your settlement is worth now. Think of it as interest in reverse: when you borrow money, you pay the lender interest for the privilege of allowing you to use his money. When you sell a structured settlement, you are paying the buyer for the privilege of getting an up-front cash payment.
This may seem unfair, but put yourself in the buyer’s shoes. You are compensating the buyer for many things. Of course, he’s in business to make a profit. But on top of that, he has operating costs: office rent, utilities, a support staff, legal fees, and all of the overhead that goes into running a business. If he doesn’t have the cash on hand to buy your structured settlement, he has to get it somewhere, and pay interest on it. Even if he has the cash available, by giving it to you he loses the ability to earn interest on it himself.
Most importantly, because the stream of payments is not accessible to the buyer right away, you are compensating him for having to wait until the payments become available. After all, money now is worth more than money you will get at some later date.
Opinions differ on what a “reasonable” discount rate should be. In a 2010 New York court case, the judge evaluating the sale of a structured settlement criticized a 20% discount rate. Other experts set a range of percentages. The best way to determine whether your discount rate is fair is to look at all the offers you’re getting for your settlement. If one buyer’s discount rate is far higher than all the others, they should be removed from consideration unless they have lots of other good qualities. If one buyer’s discount rate is far lower, this is a red flag, too; buyers will often float a generous bid in order to get your initial commitment, only to change the terms or add additional fees later on.
If possible – and some states require it – find a lawyer or financial advisor who has handled structured settlement sales recently. See if what you’re being offered is consistent with recent events in the marketplace. This is a great way to make sure you’re getting the best possible deal.
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.
