Interest drag is the practice of prolonging a structured settlement factoring transaction for several months to make up the difference of lost profits in interest. This practice is becoming wide spread across the factoring industry due to lower costs of money of certain factoring companies.
Lets use an example to better understand this tactic and how to avoid it. Lets say Jane has a structured settlement and wants to help her daughter purchase a new home. Jane receives an offer from company A* (large overhead expenses) for $135,000 and then decides to obtain a quote from company B*, (low overhead expenses) who offers her $166,000.
In this scenario company A can break even at $170,000 due to their large overhead expenses, (i.e advertising, employees, ect.....) while company B can break even at $172,000 because they do not advertise heavily and do not have many employees. Company A now tells Jane that they can offer her $173,000. At this point company A is losing money on the deal, but know they can drag the deal out for a few months longer to make the money back in interest, thus the name "interest drag."
We will explain how the process works for the investor or securitizer at a later date. For now we will explain how to avoid becoming a victim of this tactic.
A sure way to tell that a company may drag a deal out longer than necessary is if a company offers you a low ball quote to start with. In Jane's case company A provided Jane a quote several thousand less than company B, but once company A found out about the second quote they quickly bumped up their quote to be $1000 higher than the highest quote. At this point red flags should have gone off in Jane's head. Why did company A offer such a low quote to start with?
This is where it becomes tricky for a tort victim trying to factor a structured settlement. Every factoring transaction is unique in its own way. It is always best to consult a financial professional to help you find the best company to factor your structured settlement.
Settlement Quotes works with the most respected structured settlement funding companies and investors in the industry. This tactic is not tolerated by us, and any offenders are immediately removed from our network. Let us do the work of finding the right funding company for your factoring transaction.
*Company A- represents a company with high overhead expenses such as advertising, employees, and other expenses
*Company B- represents a company with low overhead expenses