Can I Take a Loan Out on Structured Settlement?

Chuck Ayers

Can I Take a Loan Out on Structured Settlement?

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When you want a loan there are two basic types. One is collateralized and the other is not, meaning it is a loan on the faith and good credit of your name (they're called personal loans or signature loans). To obtain a collateralized loan you can pledge objects of value that become the property of the lender if you don't pay back the loan. You can post anything of value as collateral, against which you can borrow money. It could be the "Mona Lisa," a bicycle, your house or a car. Since a structured settlement is a federally sanctioned annuity payment, it can be used as collateral.

1. Structured Settlement

   • Think of a structured settlement as an annuity that is paid to you over a specified period of time at specified intervals. It is usually the result of an injury or court-awarded settlement for some form of harm that you have experienced. The only significant difference between a structured settlement and a collateralized loan is that you make no payments, you only receive them. Since they are court-certified and paid by an insurance company, the settlement can be treated as any other asset.

   The Terms May be a Stumbling Block

   • If you choose to use a structured settlement as collateral, the terms of how the settlement is structured may play a part in how it can be used as collateral for a loan. In other words, if the structured settlement is set up to pay you annually and a lender wants monthly or quarterly payments, that could be problematic, depending on your financial circumstance. But that doesn't automatically kill the deal. There are options.

   Secondary Market

   • There are buyers in a secondary market who are willing to make loans against collateral, but the interest rate you will pay on the money you are seeking to borrow will likely be greater than if you used your structured settlement in the primary market with conventional banks and loaning institutions. So make certain before venturing into the secondary market that the money is needed immediately and that the structured settlement won't satisfy your needs.

   Brokers

   • Depending on the structure of your settlement, you may need a broker to find a lender. Again, the terms are likely to be less favorable, and keep in mind that a broker will want to make his money too. You may likely have to pay a commission to the broker for marrying you with a lender. There are two things to consider here: the size of the loan and possible willingness of the lender to pay the commission. If the loan is for a large amount, the broker may be willing to reduce his fee. A smaller percentage of a large loan may pay an equal or greater commission than a larger percentage on a small loan. Be aware also that the lender, if he's willing to cover the commission fees, will likely want to charge a slightly higher interest rate to cover his commission losses. This way, in the end, it comes out of your structured settlement anyway.

   Other Options

   • Depending on the amount of money you need, you don't have to use the entire structured settlement as collateral. If the settlement is paid annually, for example, and that will tide you over long enough to meet your financial needs, you can collateralize just one year of the settlement. Or you can do the same with two or three or however many years you think you need to obtain the loan money. In other words, you don't have to put the entire settlement on the line for the cash you need now.