Myth: You will lose money by factoring, so take out a loan instead.

Reality: Whether you factor annuity payments or take a loan, there is a cost to obtaining money, but many people believe that factoring involves “losing” money. This misconception comes from comparing the cumulative future payments with the present value lump sum payment offered by the factoring company.

For instance, if an annuitant has 200 monthly payments of $1,000, the cumulative payments would be $200,000. In this case, a factoring transaction might net the annuitant approximately $100,000 or 50% of the cumulative total. This is not “losing” money, it is the result of obtaining future payments early at a 10% discount rate. If instead the annuitant took a $100,000 loan at 10% and paid it back over 200 months, the total cost including interest would also be $200,000 (assuming the annuitant had sufficient credit to get the loan).

A loan requires credit, collateral, origination fees, and carries the risk of late fees and foreclosure if payments are not made when due. In the factoring scenario, the annuitant would need to wait 200 months (almost 17 years) to collect the full $200,000, during which time the equivalent present value of the payments is continually diminishing due to inflation. A dollar will not have the same purchasing power in 17 years as it has today.