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Strategies physicians can use to consolidate and manage their debt load
Physicians often have to deal with medical school debt decades into their careers, and even those fortunate enough to be clear of loans acquired while in school can still find themselves with a dozen or more debts arising from lifestyle choices. It doesn’t take long before the number of loans becomes unwieldy, so debt consolidation can be an option.
Medical Economics spoke with Chris Panebianco, chief marketing officer, Bankers Healthcare Group, about how debt consolidation works and what other debt-management strategies physicians should consider.
Medical Economics: Who is a candidate for debt consolidation?
Chris Panebianco: I think anyone really is. If you're a physician that has multiple debts, if you want to simplify your monthly payments, or are even looking to improve your credit score, anyone in those categories is someone that should really consider debt consolidation.
ME: What is the benefit of consolidating debts? What makes the difference whether you have 10 little payments or one big one?
CP: The first thing I think of, with COVID and all the stress of life, is managing those payments. With fewer payments, there are fewer balances and fewer due dates, with less of a chance to be late. It also helps improve your credit; paying off debt can decrease your credit utilization, and actually opens you up to other opportunities. On the other side, it actually is a good exercise in better financial planning. Your monthly payment, you can adjust your way of life to that monthly payment, and oftentimes save money. The increased cash flow will allow you to potentially have more money to work with each month, so whether you're considering debt consolidation for your personal expenses, or for your business, it can open up other opportunities in both sides of your life.
ME: You mentioned improving your credit rating. How big of an impact can it have by closing out some of those smaller accounts and going with one larger one?
CP: Well, typically, you don't want to close them. But a lot of lenders, if you're going for other types of loans, or a mortgage, they're looking at your debt to income ratio, the amount of debt you have compared to how much you make, but they also look at your credit utilization. And that's what factors a large part into your FICO score. So, the more you can control that and open up other lines, the better your credit can be.
ME: If a physician wants to consolidate their debt, you know what questions should they be asking potential lenders?
CP: There are really eight ways I look at it. Number one is, what type of rate? Loans typically have a fixed or variable rate, so you want to see what that means for you and how it affects your payment, you want to see if they require personal collateral. That's one of the big disadvantages with many loans, is that you're signing off some of your personal assets. You also want to ask, what's my repayment term? So the longer the length of your loan, you'll pay a higher amount of interest, but it also helps you as most Americans live on a monthly payment. So, the lower that payment is, that helps when you stretch the loan term out, and it really frees you up. The other question is, will this application or loan appear on my credit report? That's a very big question. Again, that's what other lenders are looking for. It affects your FICO score.
What's the application process? It's a very important step. Physicians are busy, you already have a lot to handle with COVID with your practice outside of the office. You want to make sure that it's something that's very easily obtained. And then you want to really look at what's the process beyond that. So, if I've gone and done all this work, how soon is it processed? Typically, traditional lending tends to take longer, and there are SBA loans as well, and those historically have taken longer. And then some of the online lenders are much faster. But there's different requirements of each. You want to weigh each one of these, and then there is the approval. How quick can I get my funds? That's a big thing, especially if you're trying to buy new equipment. If you're trying to buy into a practice, anything to do with your business, speed is of the essence. And then lastly, you want to understand that the lender knows who you are. You want someone that's going to take good care of you, they understand your business, they understand the challenges you face and how quickly you need that capital.
ME: One of the things you mentioned was the the fixed rate versus variable rate. With interest rates so low, is that a as big a decision as it used to be?
CP: It really depends. It's going to fluctuate based on the market conditions and a lot of people look at rates and they see what's happening with mortgages. And it really depends: a fixed rate, you're always going to know what the interest costs will be. It's more predictable and you can manage that. The adjustable rates tend to move and it can have bigger consequences in your payment; it can adjust and you may not be prepared for that.
ME: Are there common mistakes doctors make with debt that ends up costing them money in the long run?
CP: If you look at the average debt for Americans, last time I checked it was about $20,000 between credit cards and personal loans. When you factor in your auto installment loans and mortgages, the average national debt in the United States is over $90,000. A lot of times when you dig into that debt, you see that individuals have maxed out all of their cards, they're not paying attention to that available credit. They might have loans with multiple lenders, going from one lender to another with multiple loans for different uses. But they're only able to make minimum payments. That's one of the things that we see a lot of folks do. They say, well, the payment that was listed on my statement, it was $50. Well, that's the minimum and you're not eating into the interest, you're actually hurting yourself in the long term. Credit card companies will have to put out statements that show you how long it'll take to pay that off. And it's a much, much longer term. So, while it might be affordable, you can get yourself in trouble very quick. And then the other one we commonly see is people are busy, and they've lost track of what expenses they have to pay on what date, and they may not have things set up for auto pay. And that can really lead you into trouble.
ME: A lot of physicians really have to scrimp and save to get through medical school and residency, then they come out of residency, they get that big job, and they're suddenly awash with cash that they haven't had in a long time. Do you see instances where they just kind of lose track, because they've got so much money now that they're just kind of maybe being a little reckless with those funds?
CP: I wouldn't say that's everyone, but I think you see it commonly as people's income goes up, their expenses go up. The monthly available income is there, and they may not be as disciplined as they were on a smaller budget. I think it's a problem that as anyone makes more and more money, they tend to spend more. What we see is a lot of people look at the monthly payment and they live by a monthly payment. I think that's pretty common throughout the United States. That's affordable, but they don't look at the inner workings of their expenses. So that can last last, as we mentioned, you stretch out a loan payment, you are going to pay more interest, but it is affordable for the now. It's something that people should be aware of, and they should do their own their own checkup, per se, on their finances.
ME: So just because you can afford it doesn't mean you should just ignore the rates and kind of the inner workings of the loans that you have?
CP: Exactly. You want to look at everything. Those lenders have to spell that out for you. It's what you see now if you're going to take out a longer term loan—you want to look at what the prepayment penalty is, because you may not really worry about the interest. It's about that monthly payment because you may pay it back in a year; well make sure you check to see if there are prepayment penalties or not there, again, with balloon payments, if you're not on a fixed rate loan. Those are all the things that you have to educate yourself on and your lender should help you through that.
ME: Is it ever too late in a career to tackle debt problems?
CP: It's just like my trainer would tell me, you're never too old for that. I think finances are the same way. Whether it's your investments, your 401k, or your expenses, it only takes a few minutes to checkup on it each month. If you create a process, it'll be easier going forward. It's going to be painful at first if you're not organized, but I think you're never too old, you're never too far into your career, you never make too much money to go back and sit down and start at the basics. I strongly recommend having a financial planner or a financial adviser, especially when you're making the money that medical professionals make.
ME: I'm assuming if someone's a little closer to retirement, they might have to make a little more sacrifice now than if they started sooner?
CP: Definitely. I think you have to adjust your lifestyle, but you have to look forward to what you want the rest of your life to be. Especially in medicine, we're getting to an age where there's a lot of folks getting toward that retirement age in the medical population. And they have to sit down and figure out what the next steps are. Do they go into an income-earning position as an adviser or as a consultant? There are a lot of opportunities for that side hustle as you wind your career down, and that can keep that income flowing and protect you from a serious drop off from what you're used to. I think it's something that whether you're in the beginning of your career, or late, reach out and get some advice.