Analyzing the Loan Offer

If your finances and background are strong enough, the best way to analyze a loan offer is to get multiple bank offers and compare their terms to each other. If you’re in a similar situation as I originally was, then just pray that any bank will give you a chance. Still, you need to know what to look out for in a loan offer, so that you don’t end up being trapped with loan shark rates for an eternity.

In 2013, I saw a television commercial for Western Sky Financial, a lending company based off an Indian Reservation. Probably the most f*#ked up loan ever. They gave out a $10,000 loan at an 89.98% APR! Your repayment would be $790 a month for 84 months. This Motley Fool article says that these guys have closed down, but who the heck went for these loans in the first place? Wow. Even if you’re willing to do whatever it takes to make your solo practice dream come true, these predatory loans are clearly not the way to go.

Having said that, the interest rate is probably the most important number in a loan offer, but it’s not the only part of the equation. As I have mentioned previously, fixed rates are probably the way to go given that interest rates have been rising recently. Usually, fixed rates will be higher than variable rates. Variable rates usually adjust annually, but they could also be done longer or shorter. You can reference the 30 year mortgage rate to get an idea of the current interest rate environment. At least for practice finance lenders, you should expect them to give you rates 1-4% higher than the 30 year rate.

Now, let me tell you how you should interpret interest rates.  Do not think of them in terms of absolute values, but as a relative percentage to each other.  For example, a 6% rate is not “only” 2% higher than a 4% rate. It’s actually 50% higher. So, on a 5 year $300,000 loan, you would pay $31,500 in total interest at 4% and $48,000 at 6%. Play around with loan calculators that provide amortization schedules, such as Bankrate.

You also need to look at the length and repayment schedule of the loan. 10 years is pretty long. Most lenders will give you a 5 to 7 year term. Also, graduated repayment options are a godsend. Your goal at this point is to SURVIVE. You want to try to preserve your working capital as long as possible, and having low to no monthly loan payments in the beginning will help a lot. Of course, you’ll end up paying more for the loan since interest will still accrue while you make reduced monthly payments in the beginning. Although, many of us broke even or became profitable within a year, and ended up with a healthy cashflow within 3 years.

Another option is to have a short term loan with a longer amortization period. For example, you can borrow over 2 years, but have your monthly payments amortized over 10 years. Since shorter terms have lower interest rates, you can have the lowest monthly payments this way. However, you will have to refinance or pay off the remainder of your loan balance when the it matures in 2 years. Thus, requiring you to fill out more paperwork and pay additional loan origination costs. In a sense, you’re getting a hybrid fixed/variable rate loan. Given that most solo practices end up doing well relatively quickly, this type of loan might be a great option for you.

You will also want to know if there are any prepayment penalties, for partial or full payment of your loan, any time before your loan matures. When your practice thrives, you might want to have the option to pay off your loan sooner. Also, you might find good refinancing opportunities down the road, and you don’t want to have to pay an arm and a leg to switch lendors. In addition, you might want to pay down additional principal with your monthly payments. Some loans will just put that extra amount toward your next monthly payment instead of applying it toward your principal, forcing you to pay the maximum interest amount over the life of the loan.

Find out what kind of fees and closing costs are involved in getting your loan. Also, see what other odd requirements the lender wants you to fulfill.

Finally, don’t underestimate the importance of customer service. And don’t forget, EVERYTHING is negotiable. If you have multiple loan offers, be sure to leverage that fact against all banks.

On the Dental Town finance message board, people share their various loan offers. You can get a feel for what the hard numbers are currently on this site.

 

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