Low Interest Rates = Good Value
By Brandon Black
Greek austerity, the price of gold, the economy, and interest rates…what does it all mean to those receiving structured settlement payments who may be thinking now is the time to sell?
The short answer is that now is a historically good time if you find yourself presented with an opportunity to start a business, buy a first home, or continue your education. Likewise, if you find yourself, as so many have in the current economic climate of reported unemployment nearing 9% and real unemployment closer to 15%, in a difficult financial situation. The reason: very low interest rates driven by economic uncertainty.
The key interest rate metric is the Wall Street Journal Prime Rate or “Prime Rate”. This rate, published as the name indicates in the Wall Street Journal, is a survey of the 30 largest banks in the country and is synonymous with the rate at which banks will lend money to their very best customers. The Wall Street Journal Prime Rate has been at 3.25% since December of 2008, an extremely long period of extremely low interest rates. By way of comparison, the Prime Rate was 20.00% thirty years ago in June of 1981, a staggering 560% difference versus today’s Prime Rate.
The reality is the current rate environment means that sellers of structured settlement payments are selling today at discount rates that may be nearly equivalent to the imputed rate used to calculate the annuity payment stream at the time the policy was issued. The fact that structured settlement payments are set in the future means all sellers receive a discounted present value for the payments. The lower the prevailing interest rates the less those future payments are discounted and greater value achieved upon sale.
It’s anybody’s guess just how long the current interest rate environment will hold sway. The consensus appears to be that the US economy will continue to sputter along at an annual growth rates of between 2.7% and 3.0%. To that end, the Federal Reserve revised its forecast for growth and employment this year and the next indicating in yesterday’s FOMC policy statement that the economy is likely to expand only 2.7% this year and only 3.3% in 2012 with unemployment similarly stagnated at 8.6% to 8.9% for the remainder of 2011. Slow growth, moderate inflation, and continuing concern about the general state of the economy mean this period of extremely low interest rates is likely to continue for the foreseeable future. So if you’re thinking of selling your structured settlement annuity payments you may never receive a better value for your payments in the secondary market than right now.
