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Discount Rates and Structured Settlements
Discount Rates and Structured Settlements
When one attempts to sell their structured settlement, a factoring company cannot pay the total sum of all payments to the holder of the structured settlement. This is because the factoring company is foregoing interest on the sum of money, if the money were invested elsewhere.
Cebu,
VT,
United States
(pr4links.com)
18/10/2010
"Therefore, when offering a lump sum payment for a structured settlement annuity, the factoring company will offer a discounted figure than the sum of remaining payments."
When a company purchases a structured settlement, the price they agree to pay is based on the discount rate they apply to the payment stream. A discount rate has the same exact meaning but is used to calculate the present value of future cash flows. All structured settlement factoring transactions use discount rates to calculate the present value of the transaction.
When one attempts to sell their structured settlement, a factoring company cannot pay the total sum of all payments to the holder of the structured settlement. This is because the factoring company is foregoing interest on the sum of money, if the money were invested elsewhere.
For example, an injured party has a structured settlement that will pay out $50,000 over 10 years. If a company paid $50,000 as a lump sum payment to the injured party, the company is essentially paying a 0% discount rate. The saying $1 today is worth more than $1 tomorrow would not apply in this scenario. The factoring company is a business and needs to make a return on the investment of providing a lump sum today and in return has to wait for the payments to come in over the next 10 years. For this reason, a discount rate has to be applied to the transaction.
Therefore, when offering a lump sum payment for a structured settlement annuity, the factoring company will offer a discounted figure than the sum of remaining payments. The discount rate applied may be half of the remaining payments, depending on how many payments remain and the length of time for the eventual payout. Generally, the less time for full payment of the structured settlement, the lower the base discount rate will be.
Both state and federal law now require that the purchaser of the structured settlement disclose the discount rate used, as well as any other charges applied to the purchase price.
In addition, a court will be required to approve of the sale of your structured settlement in most states. A 40% excise tax is applied to all transactions that do not get approval from a local court.
Different companies will apply different discount rates in offering to purchase your structured settlement. Rather than simply accepting the first offer made, it makes sense to obtain multiple offers from multiple companies, to find the companies that offer the lowest discount rate.
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