A structured settlement loan is an agreement between a physical or legal person and another person or company that resolves a claim for damages in instalments.
Structured settlements are often used as a lump-sum settlement for personal injury or wrongful death cases. Structured settlements are also employed in cases in which future circumstances make a lump sum payout undesirable. For example, in a case involving an inaccurate diagnosis, a company pays the individual in instalments so he can maintain the present lifestyle while his condition progresses.
Structured settlements have a number of benefits. Perhaps the most important is the potential to provide recipients with a monthly income for life at a lower cost than a life insurance policy. The recipient is also able to use the proceeds as he or she wishes.
Structured settlements provide a stable plan for the money to be received and provide security for the individual who is receiving it. There are many positives and negatives to a structured settlement. One of the negatives is that if one has a structured settlement, they can’t access the money in it.
Can I Use My Settlement as Collateral for a Loan?
I have a structured settlement, and I’d like to cash out. Can I use it as collateral for a loan, so I don’t have to pay a fee for the loan?
If you qualify, you may decide to use the settlement amount as collateral. But you shouldn’t – you can’t – as many lenders view the settlement amount as if it was debt that was to be paid with the loan.
Instead, it’s viewed as a valuable asset from which you may get a loan.
For example, a client told us that he used a portion of his medical settlement proceeds to finance the construction of his new home. He told us it was a sound investment. His interest in the property is only limited to getting enough down payment to refinance the loan. He may also sell the home if he doesn’t like it or rent it out under a month-to-month contract.
You may qualify for a second mortgage loan with the settlement. But that requires a significant out-of-pocket investment that you may have decided not to make.
Don’t confuse the settlement amount with debt. It may be necessary as the first source of collateral, but it’s not the obligation to repurchase the home when you’re no longer living there.
As with any other loan or loan option, you should find out all you can about the settlement and how much equity you have in the home and what you’ll be using it for.
While cash options can be extremely appealing, don’t overlook the other options, such as second mortgages, which have higher minimum interest rates.
Can I Use My Settlement to Get a Loan?
Are you thinking about getting into a structured settlement (also known as an annuity) or an employer-sponsored deferred compensation plan? As a long-time annuity advisor with a history of helping clients like you reach their goals, I’ve noticed a trend: more and more clients are asking about their ability to use their structured settlement funds for a home purchase or other types of loans (check here for more info on the new home purchase loan options).
The short answer: YES! It’s definitely possible – but please know that there are plenty of important things you’ll need to consider before you make a decision. For starters, one of the essential questions, especially for a client such as you, is: “Am I eligible for a structured settlement loan?”
In many cases, this question is just the first step (and a necessary one), but there are other issues to consider, too. Because each state has different laws governing and the limits on structured settlement loans, it’s important to understand what benefits you may be entitled to based on your own state and any state you’re transferring to – in addition to researching and understanding any law that might affect your decision.
I can help you figure out if you’re eligible for a structured settlement loan with my state’s laws.
You need to consider the following questions:
- Are you qualified for a loan from the lender?
- Can you afford a loan?
- Can you have negative equity, i.e., the equity cushion that the loan helps protect against?
- Can you make the payment?
- Can you make interest-only payments?
- What may I pay down the principal with the principal?
- Can I use the money from my structured settlement funds for my own spending?
Can I use Structured Settlement as Proof of Income?
I was very interested in learning more about using structured settlement loans to prove your income when applying for unemployment. To that end, I contacted Jennifer Stellman over at the National Employment Law Project (NELP) website and asked her to answer my question. She replied:
The first potential avenue is the traditional method of using the monthly benefits from your structured settlement loan as proof that you have earned income in each of the three years after you pay the loan off. But this is not the most reliable option.
There are several problems with this approach as well as the benefits:
One of the most problematic is the risk that the income that was supposed to have been received from the structured settlement, even if received by mistake, may actually have been paid out as government benefits in the past. Such a discrepancy in the receipt of benefits would create a lot of confusion for your former employer. Plus, it’s not at all unusual for employment compensation to sometimes be withheld or paid out by mistake.
Furthermore, if the structured settlement is being used to support your self-employment, or if you want to receive less than the amount of the structured settlement, the government benefits could increase taxes that could reduce your income when you receive unemployment compensation.
You also risk the risk that another employer may come into the picture that pays higher wages or more of your self-employment income for your benefit because your unemployment insurance benefits will make up for the difference. This again would cause confusion when you discuss with your former employer.