If someone offered you a choice between $1,000 today, and $1,100 one year from now, which would you take? Most people would take $1,000 today. How is it, then, that money you have in your hand now is worth more than some future promise of more money?
There are a couple of reasons. One is that the prices of goods and services may increase to the point that the future $1,100 won’t have the same buying power as today’s $1,000. Another reason is that there is a risk that the promise of $1,100 in a year won’t come true.
So, how does this concept apply to your structured settlement?
If you are attempting to sell your structured settlement, you may have noticed that prospective buyers are offering you far less than the total amount of the payments you are trying to sell. The buyers are using a discount rate to scale back the total amount of the scheduled payments to the amount they are willing to pay for them. This is the time value of money in action. Buyers use a discount rate as a way to compensate for the fact that they’ll have to wait for their money – they have to wait until your structured settlement pays out. Buyers also want to be compensated for the expenses they’ll incur in the factoring transaction, their overhead, lost interest on the cash they’re giving away, and, of course, profit.
Meanwhile, the discount rate for you is essentially interest in reverse. When you borrow money, you have to pay back the amount you borrowed, plus interest, right? That interest rate compensates the lender for his expenses, the time that he has to wait to get his money back from you, and his inability to spend it or make money on it while you’re using it. So, the discount rate is essentially “interest” that you’re paying for the privilege of not having to wait for your money.
If this seems unfair, remember that you have the option of not selling your structured settlement. Do you have a legitimate emergency and no other way to pay for it? Or are you simply attracted to the siren song of quick cash? Structured settlement buyers can charge discount rates in the double digits because they know that getting cash now, either because you need it or just want it, is a powerful incentive. Before you sell, really give some thought to how important that cash is to you, and whether you really want to give up so much to get it now.
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.
