Lump Sum Payment
Categories: Credit
You win $100 million in the lottery. Typically, you get a choice. Either you take a lump sum payment, or you get paid in installments.
The lump sum means you get all the money now. You just cash that big $100 million check they handed you. (And pay boatloads of tax.)
Meanwhile, the periodic payments means your amount gets spread out over a period of time. For instance, they could pay off your $100 million winning over the course of 20 years. So instead of getting a single $100 million check, you'd receive $5 million a year over 20 years.
A lump sum would likely involve a larger tax hit, depending on the situation, which might encourage you to take the more-spread-out option. Also, you run the risk of blowing through the money fast (like pressing your luck and buying another 100 million lotto tickets). Taking the periodic payout can help control some of these issues for the financially unsophisticated. And let's face it. If you bought any lottery tickets, it's likely that you are, um...lacking in the realm of financial sophistication.
However, the longer-term option creates the risk of not actually receiving your full amount. A lot can happen in 20 years. If, 15 years from now, the creatures from Zorkon 7 arrive and obliterate all human civilization, you'll be kicking yourself for not taking the lump sum.
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Finance a la shmoop what is balloon interest or a balloon payment. All right
people you blow and blow and blow and blow and then one day it pops. Well [Balloon with loan written on it explodes]
that's kind of what a balloon loan looks like in most cases common loans are paid [House with a sold sign]
down as they go like a home mortgage on you know your brand-new home there
Well it starts out as 400 grand payable over 30 years and then little by little
grinding away year after year after year the loan is paid down and the final [Years going by and the principal remaining reducing]
payment is like well just a few grand and you're the proud owner of a 30-year
old shack it's become one after 30 years... Well were this a balloon payment style [Picture of a wooden old house]
of loan well you might have just paid interest on that four hundred grand for
twenty nine point nine years and then that last payment would be the four
hundred grand principle you'd borrowed. Huge or as a famous real estate man once
said huge, that could be one month's interest on the four hundred grand plus [Donald Trump appears]
four hundred grand well that last balloon payment will have
popped when you've paid off your house. Well the same structure of debt lives in [Guy pops the balloon with a pin]
the world of zero coupon bonds and t-bills as well where you as an investor
buy a notional par value of say a grand, at a discount meaning you're buying that
thousand dollars at a discount... meaning you pay six hundred forty-two
bucks for a payment of a thousand dollars in six years with no payments of
interest or pay down of principal in between. That final loan payoff is the [Hot air balloons in the background]
balloon oh happy day and it isn't even your birthday [Guy in a suit dancing with balloons and confetti falling]