When you deal with “Boy Scouts settlement loans,” you aren’t actually looking for a product; you just need a temporary solution for a cash-flow problem that’s been going on for longer than you expected. This is totally justifiable. However, it’s never justifiable to sign a loan document you don’t understand just because someone said, “loan,” left a 16-second pause, and sped through some other stuff.
Many requests labeled “settlement loans” on the offer sheet are absolutely, positively, unequivocally not loans. They’re more likely to be cash advances, or assignments, or maybe even a purchase of a portion of what you sure are likely to receive, but the issuers of the offer paper know their phrasing is more mortgagish.
This entry attempts to shed some more light on what such agreements likely are, how the total cost tends to be hidden, what to look for to avoid these agreements, and what you might ask first to cause the least damage to yourself.
But is it really a loan?
Sometimes it is. Most of the time it is not.
A real loan with a financial institution comprises principal, a stated interest (APR), a time frame for the loan, and a payment schedule. Quite a number of settlement funding contracts are…not contracts… are… loans… are, or at least are supposed to be something of a loan that contain such clarity.
Most, if not all, of these “settlement loans” fall into the following categories:
- A loan (recourse): you receive the funds and must pay the money you just received… loans happen and are paid back.
- Non-recourse advance means ‘if you don’t get paid, you don’t pay.’ While true, it is usually the higher priced option and the contract exceptions usually matter much more than the marketing slogan would lead you to believe.
- You can also consider the assignment/sale of proceeds agreements where you ‘transfer’ or ‘assign’ the rights to some portion of your future funds. It may not be referred to as ‘interest’ but it can function like it.
You can think of it like this – don’t debate the label. Just evaluate the math and the triggers: how much do you receive today, how much do you give up later, and what conditions would let them legally come after you for repayment?
Hidden cost structures (and why comparison is hard)
For payment structures as with these, the cost problem is not simply that these structures can be expensive. It is that they are intentionally structured to make it extremely difficult to make an apples to apples comparison.
Instead of a clean APR, all sorts of things get thrown in that mean:
- ‘factor rate’
- ‘usage’ or ‘monthly’ fee’
- ‘origination’ or ‘processing’ fees’
- ‘consulting’ or brokerage fees’
- servicing and wire fee’
- and minimum return clauses
All these also have a tendency of getting more expensive over time. If your timing of payouts slips, your obligation can grow and it can grow fast.
Get everything you can in writing (especially this)
Get everything you can in writing. But in particular, get a payoff table.
In your documents, make sure there is a payoff table. It should include what the total payoff/assignment would be, if a payout occurs, at the time intervals of:
- 6 months
- 12 months
- 18 months
If they don’t do this, then you would be agreeing to a cost that is not even described.
Things that should definitely stand out
Things should be self explanatory. But for some reason the most simple things are the things that get ignored.
- “Guaranteed Approval” or “Guaranteed Timing.” Settling is never guaranteed.
- No example given for vague pricing. If the pricing structure is simple, they should be able to present the dollars at 6/12/18 intervals.
- There is a lot of pressure. If someone tells you “This offer expires today”, they are trying to pressure you to make a bad decision.
- There are exceptions to non-recourse agreements. If they are not responsible for the debt, make sure you read closely to see when they can make you repay.
- Hidden liens. These can complicate your ability to get other loans.
- They don’t encourage you to get a legal review. If they are not being helpful. They’re just avoiding a legal review.
Contract clauses you must read (not skim)
These are the most important sections:
- Recourse / Non-recourse terms: When is the repayment due, and when can it be considered your fault?
- Fees and compounding: Payment cycles, are there fees that compound, and is there a minimum repayment amount?
- Assignment language: What rights are being relinquished, and can the company intermediate your conversations?
- Dispute resolution: Arbitration clause, preferred venue, and attorney-fee provisions.
- Security interest / UCC: Can they place a lien like interest in the proceeds, or rights to the proceeds?
If you start zoning out, that means you should be slowing down, not signing faster.
Safer Alternatives (Usually Cheaper, Sometimes Much)
Settlement funding is always an option, and people do need cash now, but it should not be your first option.
Consider these options first before you sell your future dollars for fewer dollars now:
- Credit union personal loan: Almost always cheaper than the deals offered by funding.
- Payment plans with creditors: It is not as sexy as other options, but it is effective and can be negotiated with.
- Hardship Programs: Utilities, food, rent assistance—these can help avoid the need for financing and buy you time.
- 0% Intro APR Credit Card (if you are careful): Only if you can actually pay it down before the promotional period ends.
- Borrowing money is not easier: If borrowing money is necessary, getting the less money for the a shorter period of time will usually less the impact.
There is nothing wrong with getting a settlement advance, but be aware of how high the interest is, especially how high the interest of any urgent loan.
A decision making policy that makes sense
If you cannot write down the answers to the following, you should not be signing anything.
- What is the net amount of money that I will take today after all the fees are taken from the overall amount?
- At 6 months, 12 months, and 18 months, what amount of money will I be losing?
- Will I ever be required to pay the money back? I f so, what is the time frame and what is the outcome?
- What are the consequences if the money that is owed to you is lower than what was initially anticipated?
If the seller is unable to answer these questions, you should not be concerned with that problem. Just leave.
The Frequently Asked Questions
Is a Boy Scouts settlement loan the same as a payday loan?
Not considering the structural framework of the two loans, the effective cost can be the same if the fees are high and time is extended. Do not think you are safer if the loan has different wording.
What does “non-recourse” really mean?
In general, it means that there will be no pay back if no money was received, however clauses and stipulations are usually ignored. Review the clauses as that describes how the contract should really be interpreted.
Will this affect my credit?
It really just depends on how the arrangement reporting structure is set up. Some arrangements (not loans) aren’t reported. That does not mean they are harmless or cheap.
Can they place a lien on my settlement proceeds?
Many funders use a security-interest or UCC-type filing. Whether that is permitted or effective however depends on the contract and the jurisdiction, but you should assume they will cover their bases.
What is the single best way to compare offers?
A written payoff table at 6/12/18 months with all the fees included, and whether it’s recourse or not. If they refuse, you do not have a comparable offer.
Should I talk to a lawyer or financial advisor first?
Yes. Especially if the agreement is complex or wide-ranging. A quick look over
