When factoring a structured settlement, there are several key points to consider. The term of the settlement is obviously important since it determines how long it will take for a consumer to receive the entire balance of his money, and for large sums, it can also have a huge effect on the overall amount of interest drawn from the funds. Considering the immediate upfront payment is also vital for consumers since it will determine their short-term buying power. The frequency at which payments are received is another factor to consider.
Whenever lending institutions are factoring a structured settlement, their ultimate goal is to extend the repayment terms as long as possible. The reason for this strategic maneuver is simple; the longer the funds remain in their possession, the more interest they may yield. A simple example would be a consumer owed $100,000 US Dollars (USD)—if the entirety of that amount were paid up front, it could earn the consumer 3 to 7% interest per year in simple mutual funds. Over 20 years, the principle on that account would have effectively doubled, meaning that factoring a structured settlement is a constant loss of revenue. Banks normally try to seek arrangements where the interest alone would be enough to repay the consumer, which essentially means that the principal was given to them for free.
For this reason alone, consumers should seek a large portion of upfront money whenever they are factoring a structured settlement. This not only allows them to deal with immediate expenses that may be present, but it also presents an additional stream of revenue from the accrued interest. Likewise, when factoring a structured settlement, it should always be a goal to receive full payment within the shortest amount of time possible. Even if the funds are not immediately necessary, it makes more sense for the consumer to receive the daily interest from these funds than to allow a bank to have that benefit.
Along the same lines of thought are the frequency of the payments, because every day that the funds remain in the hands of the financial institution is a day that the consumer is denied receiving interest on his money. On $1,000,000 (USD), the amount of daily interest would be just under $140 (USD) at a 5% interest rate, which calculates to around $980 (USD) per week. When a consumer is factoring a structured settlement, these types of numbers should always be remembered because it is essentially the amount that they are agreeing to give away when settling for anything other than a lump sum payment. Likewise, if a one-time settlement amount for 40 to 60% of the total is offered, it can often result in much overall money to an educated investor when compared to the structured settlement term.