For the vast majority of us doctors, a career in medicine will also mean spending a significant portion of our adult lives carrying multiple forms of debt. Understanding student loans (the average medical school graduate in 2019 had $201,490 in student loans while the average dental school graduate had $292,159), credit card debt, home mortgages, car loans, and practice loans, becomes a worthy exercise given the potential impact – both positive and negative – these products can have on our personal and professional lives as we consume them.
We’d like to propose a methodology to understand and assess loan options, using a doctor-specific perspective, to better appreciate when the pros outweigh the cons or vice versa. This methodology is based on our experience in speaking with applicants through the Doc2Doc Lending platform (the platform facilitates personal loans exclusively to physicians and dentists, and as part of the application process offers each applicant a call with a doctor-member of our Doc2Doc team to speak through the product, application process, and the applicant’s goals) and it is by no means meant to be financial advice. Through these conversations, we have observed many similar themes that arise from applicant to applicant which has formed the basis for this construct.
In our experience, there are three common areas that will generally be the determining factors as to whether a loan may make sense:
- the immediate and future impact on cash flow
- the total cost of the money borrowed over the entire term of the loan
- the degree of flexibility built into the terms of the product
Calculating personal cash flow
Cash flow is the calculation of how much money comes in (usually calculated monthly) minus how much goes out. Taking on a loan can have either a negative (e.g., taking a mortgage for a second home) or positive (refinancing credit card debt to a lower rate) impact. For doctors, this calculation will usually change at discrete moments in time, so it has to be made for the current state and the predicted future state(s).
For example, a doctor who is joining a private group practice immediately after training may have the option to buy shares of that practice at the time they join. Possibly, she will not have the capital to buy the shares, even if it were in her financial interest to do so, and so she will explore financing an equity stake in the practice through a loan. To know if taking a loan for the buy-in is financially possible, she first must calculate her monthly cash flow as she begins working in the new practice. This will determine not only if the loan makes sense, but also how much she can afford to borrow (and thus how many of the shares offered she can purchase upfront).
Over time, as she establishes her practice and begins receiving bonus payments as an equity partner (or not), her cash flow position may change which may impact her decision-making with regards to borrowing initially. Therefore, the future, predicted cash flow should also be considered.
Cash flow is most sensitive to:
- the term (duration) of the loan
- the interest rate of the loans
- the fees built into the loan
Understanding the cost of capital
The next important feature to understand with any loan is how much it will cost to borrow a specific amount of money. This is the amount that the institution will make from lending the money to a borrower.
By way of example, a 30-year, fixed-interest home mortgage for $500,000 at 4.0% annual percentage rate (APR) will cost approximately $359,347 in total interest over the entire term of the loan. Both cash flow and the total cost of capital can vary significantly between one loan product to the next.
Loan flexibility to meet your needs
This may be the most underappreciated component when evaluating whether a loan is the right option. As doctors, there are discrete milestones in our careers when our financial situation changes.
- When graduating from medical school to residency, most transition from taking loans to making a salary and making payments.
- When transitioning from training to the first practice position, a doctor’s salary will increase by several multiples. Ideally, a loan will have the capacity to accommodate the financial goals at each of these periods.
The most common hindrance to allowing this flexibility is in the form of pre-payment penalties. These may be referred to as an “interest-guarantee” or “lockout” in the terms of the loans and can be missed if not studied carefully.
The obvious benefit of avoiding a prepayment penalty is that, as our financial situations predictably change, so too can our approach to removing debt as minimal costs. In the example used above, as the doctor who bought in to her private practice begins seeing an increase in her monthly cash flow, she could choose to pay off the loan used for the initial buy-in more quickly than the term dictates. If there were no prepayment terms, paying this debt off early would also decrease the cost of capital associated with that loan.
As doctors, debt is a real and important part of our personal and professional lives. We hope this framework may serve as a starting point for better understanding when a loan is the right decision for you.
Kenton Allen and Zwade Marshall are anesthesiologists. They are cofounders, Doc2Doc Lending, a novel lending platform created for doctors, by doctors, with the aim of facilitating fast access to personal loans at rates that make sense. Doc2Doc Lending was founded on the belief that doctors are a unique group that are more responsible in repaying debt obligations than the general population. Doc2Doc Lending employs a proprietary underwriting algorithm that considers doctor-specific metrics to enable interest rates that are often more favorable than those found at traditional banks. Drs. Allen and Marshall are neither licensed financial nor investment advisors; they are not accountants or attorneys. Any opinions expressed above are solely their own. Learn more at www.doc2doclending.com.
Image credit: Doc2Doc Lending