When a Structured Settlement Loan Can Get You in Trouble

If you are receiving periodic payments on a lawsuit settlement or lottery win, you can use a structured settlement loan to get cash today. There will be many lenders willing to extend a loan against the money since it represents a guaranteed, court-ordered revenue stream. However, the loans are not cheap. Lenders know individuals seeking structured settlement loans are facing emergency situations where they simply cannot wait for money. As a result, the loan have high interest rates, which can spell trouble for some borrowers. Look out for these scenarios.

Your Loan Limits Exceed Payments

Responsible lenders will extend a structured settlement loan based on a low loan-to-value ratio. This simply means that the amount you secure will be lower than the payments you are expecting. Low loan-to-value ratios are common on structured settlement loans because the collateral being used (i.e., your settlements) have not yet been delivered to you. Something could go wrong in the delivery, and you could hypothetically fail to receive the funds. Some lenders will not follow the low loan-to-value ratio on these loans. Instead, they will extend you a high limit loan with a high interest rate. As a result, you will owe far more back to the lender than you are receiving through the payments. If you lose your other income source, it could be very challenging for you to repay the lender under these conditions.

You Have Other Large Debts

A prudent lender will check your other debts before extending you a loan. There is a simple reason behind this: your debts are subtracted from your current income to determine how much money you can truly allocate toward a new loan payment. Some lenders will extend you large limits despite the fact that you have other debts. As a result, when you do receive one of your settlement payments, you may not have enough cash from that payment to cover all of your debts. You will have to pay your mortgage, insurance, auto loan, student loans or other debts in addition to your settlement loan payment. 

You Cannot Manage Your Money

Many individuals who need to seek settlement loans do so because of financial emergencies they cannot control, such as medical bills or job loss. Others will seek the loans because they are in financial trouble due to their own actions. If you are taking the loan for the latter reason, this could be a red flag regarding your ability to satisfactorily repay the debt. With the very high interest rates and finance charges associated with these loans, failing to repay the debts on time can be detrimental to your financial future. Only you can judge whether your money management skills are good enough to take a large loan. You will have to be disciplined to pay your debts first every time you get a settlement payment. If you can do this, then there is little to fear in a structured settlement loan with manageable limits and monthly payments.

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