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Ask Dr. Don

Competitive lease rates

Dr. Don,
I have an excellent credit rating and a substantial net worth. What effective interest rate should I expect to pay on a three-year automobile lease with no down payment?

Dear John,
You should be able to get the same effective interest rate from the leasing company that you could get on an auto loan. When you think about it, that makes sense. Your credit rating isn't any different between the two financing alternatives, the collateral is the same, and the lender's cost of money should be virtually identical to the leasing company's.

Selling VA disability benefits

Dr. Don,
I recently received a quote from a company that will buy 96 months of my VA disability payment of $500 per month for a lump sum of $19,404. Are these companies legitimate and would this be a wise decision on my part?
Paul Payment

Dear Paul,
There are firms out there that will buy future VA disability payments from you. You have to be able to show that the payments aren't your only source of income and there is an eight-year (96-month) limit on the number of payments they can buy from you.

The firm may require that you buy or assign insurance coverage to pay the company in case you die before they receive all 96 disability payments.

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From a financial perspective, it's a lousy deal for you. The company that buys the payment stream for $19,404 earns an effective annual return of 27 percent on their investment. Would you invest in something that gives you a 27 percent guaranteed return? I sure would. So why are you considering selling those payments so someone else can earn 27 percent off your disability checks?

You can use the Bankrate's Loan Payment Calculator to confirm the effective annual interest rate. Just input $19,400 as the loan amount, 96 months for the loan term, and 27.38 percent as the interest rate, and you'll see that the payment is about equal to $500. This means that 96 monthly payments of $500 are worth $19,400 today to an investor that requires a 27.38 percent rate of return on his investment.

If they earned 12 percent you would be getting a check for $31,000. The stock market has historically earned about 12 percent annually and it's fraught with risk. Why should someone earn 27 percent off you, risk free?

In researching this topic I've seen references to Title 38, U.S. Code 5301 that state that the assignment of veterans benefits to a third party for lump-sum payment are specifically prohibited, but I also found several firms in the business of providing you with that lump-sum benefit. I don't have a definitive answer as to the legality, but I can be definite in telling you that they're not a good deal.

In a press release earlier this year, Acting Secretary of Veterans Affairs Hershel W. Gober said, " VA lawyers are still studying the fine print in these schemes to determine whether they are legal. Even if they're legal, they're despicable because they take money away from people in the direst financial straits."

-- Posted: June 25, 2001

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