Key Takeaways
- Structured settlement loans do not exist. Companies that advertise this may be disingenuous in what they are really offering you.
- When you have a structured settlement, you have the option to sell your payments to a company in exchange for a lump sum. But this is a sale, not a loan.
- Structured settlements also typically cannot be used as collateral.
What Is a Structured Settlement Loan?
In short, the answer is that structured settlement loans don’t exist.
You may see plenty of ads around the internet advertising something called “structured settlement loans.” This idea might be appealing if you have a structured settlement and a financial need that exceeds the payments you’re getting.
Maybe you need to renovate your house, or you need a new car. Or medical bills are threatening to overwhelm you. There could be any number of reasons that your settlement payments aren’t enough right now.
However, it is not possible to get a loan against your future structured settlement payments.
While some businesses advertise structured settlement “loans” online, a loan is not what they’re really offering.
Usually, these are factoring companies that are looking to buy your future payments. This is an option for people who own structured settlements. You can sell all or a portion of your expected payments at a reduced rate in exchange for cash.
But this is not a loan, and you are not borrowing money. You also don’t have to have a high credit score, there is no schedule of repayments and no interest charge.
According to an article from MyCreditUnion.gov, a loan naturally involves receiving money and then paying that money back with interest. This holds virtually no relation to what happens when you give up your structured settlement.
Instead, surrendering your structured settlement is a sale. You are selling all or part of your structured settlement payments and will stop receiving the regular income stream you may have been relying on.
Additionally, a lawsuit advance, or pre-settlement funding — an arrangement in which a plaintiff receives money before their case is settled — is also not considered a structured settlement loan.
Put simply, a structured settlement is not a loan or a bank account, and the only way to receive money from your settlement is to stick to your payment schedule or sell part or all your payments to a reputable company for a lump sum of cash. Any company that tells you it can give you a structured settlement loan is misrepresenting the transaction and its intentions, and you likely do not want to do business with them.
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Why Can’t You Use Your Settlement As Collateral?
Collateral is an asset used to secure a loan. When a bank accepts something of value as collateral on a loan, it must feel confident that it can seize that asset if the loan payments aren’t made. The tax-free status of structured settlement payments restricts the transfer of the settlement, and therefore, the bank can’t seize it without court approval — which it is not likely to get.
Lawmakers see structured settlements as a way to help people who have been harmed or are otherwise unable to care for themselves. In this capacity, the settlement eliminates the injured party’s need for public benefits. Structured settlements are considered compensation for injury, rather than income.
Because this is the intended use of a structured settlement, most banks will not accept a structured settlement as collateral for a loan.
In addition, other legal hurdles ban the use of structured settlements as collateral on a loan.
Be cautious of any company that sells a structured settlement loan. No such product exists. Any company that offers one is not telling the full truth, so it’s best to stay away from such companies.
Timothy Li, MBABusiness Finance ManagerTimothy Li, MBA, has dedicated his career to increasing profitability for his clients, including Fortune 500 companies. Timothy currently serves as a business finance manager where he researches ways to increase profitability within the supply chain, logistics and sales departments.
What About Using the Structured Settlement As Proof of Income?
While you can’t use your structured settlement as collateral, the bank will typically accept it as proof that you can repay your loan.
You might want to get a mortgage to buy a new home, for example, or a second mortgage to finance home improvements. One thing that banks and other mortgage providers look at to determine whether to approve the loan is the applicant’s ability to make loan payments.
You can get proof of your structured settlement income from the administrator at the company that is making the payments to you. You can also show bank deposits of past structured settlement payments. The bank or mortgage company may consider these when determining whether to give you a mortgage.
Frequently Asked Questions About Structured Settlement Loans
There is no such thing as a structured settlement loan. Companies that claim to offer structured settlement loans are just buying your future payouts in exchange for you to receive a lump sum of cash now. Remember that your structured settlement is designed to meet future needs, and this transaction can affect your payout in the long run.
You cannot borrow against your structured settlement, but you can sell all or a portion of it for a lump sum of cash. You can also seek pre-settlement funding or lawsuit advances to cover legal bills prior to a lawsuit settlement.
Money from a structured settlement is placed into an annuity. The settlement agreement determines how you receive your payments — whether they begin immediately or at some later date. You can choose to cash out your annuity with a lump sum payment by selling your structured settlement, but you may lose money in the long run.
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