by admin
13. July 2010 03:55
Hi everyone. J.G. Wentworth here.
If you’re in a financial pinch, a loan is a great thing. That is if you can afford to repay it. To see if someone can repay a loan, I like to borrow a trick from commercial banking. When a company borrows money, the banks look at how much cash the business generates each month versus what the loan costs each month and then pick a comfortable ratio.
For instance, if a business generates, say $1,500 a month in cash free and clear, the lender will make a loan that costs the borrower just $1,000 per month, or perhaps just $750. By doing so, the lender can be sure that the borrower has one and a half to two times the amount of cash needed to make their loan payment each month. The relationship of free cash to loan cost is known as a coverage ratio.
Though banks don’t often calculate coverage ratios for personal loans, for your own piece of mind you should, if you are considering taking out a loan. Your “free cash” is the amount of cash you have each month after you pay all your bills, and this amount of money should be one and half to two times greater than the cost of your loan. If it’s not, maybe you should reconsider whether or not you can afford the loan. And if you have no free cash each month, you should definitely not be borrowing money.
Now JG Wentworth doesn't offer structured settlement loans or annuity loans, but this discussion underscores one of the primary benefits of selling structured settlement and annuity payments. When you sell payments, you avoid going into debt altogether. For some folks this is a good thing, because going into debt is sometime the first step toward getting in over your head.
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