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As repeated several times throughout this blog and the structured settlement secondary market, settlement factoring transactions are priced using discount rates. There are several variables that determine the overall discount rate a transaction receives, including time value of money, future value, court filing fee's, payment stream, misc. costs, and salaries. All of the above variables increase the discount rate due to the expenses the factoring company incurs during the transaction process. Below, we will outline exactly how this effects the bottom line for the consumer.

Overview with example

Discount rates can be deceptive depending the length of time a payment may or may not continue for. Lets use an example to illustrate a few scenarios.

Payment Stream 1- 1 lump sum of $30,000 due on July 1st of 2010.

  • At a discount rate of 8% the present value of the payment stream is $25,352.

At this point a company will have to deduct court filing fees, salaries, advertising costs, and other misc. fees. By subtracting just $3500 for court filing fees the discount rate balloons to 15.21%. By deducting any further money off of the present value for any other fees, the discount rate will continue to increase.

Payment Stream 2- 150 monthly payments of $3000 effective immediately

  • At a discount rate of 8% the present value of this payment stream is $285,796.

Once again a company will deduct court filing fees, salaries, advertising costs, and other expenses. By just subtracting the $3500 for the court filing fees the discount rate is at a respectable 8.24%.

As you can see the longer and larger payment stream induces a lower discount rate due to the longevity and magnitude of the transaction, while a smaller lump sum payment can quickly see discount rates in the high teens.

We will continue to talk about pricing models of structured settlement factoring transactions over the next few weeks. If you have any questions, please comment and we will be sure to answer them asap.

Feel free to use our discount rate calculator to price your own structured settlement.

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