Medical EconomyÂ® (ME): Who is a candidate for debt consolidation?
Chris Panebianco: I think anyone is. If you’re a doctor with multiple debts, wanting to simplify your monthly payments, or just looking to improve your credit score, anyone in these categories should really consider debt consolidation.
ME: What is the benefit of consolidating debts? What makes the difference whether you have 10 small payments or one big?
Panebianco: The first thing I think about, with COVID-19 and all of the stress in life, is how to deal with these payments. With fewer payments, there are fewer balances and fewer due dates, with less chance of being late. It also helps to improve your credit; Paying off debt can reduce your use of credit and actually opens up other opportunities for you. On the other hand, it is a good exercise in better financial planning. You can adapt your lifestyle to this monthly payment and often save money. The increased cash flow will allow you to potentially have more money to work with each month.
ME: You mentioned improving your credit rating. What impact does it have on your bill if you close some of these small accounts and consolidate them into one?
Panebianco: As a general rule, you don’t want to close them. But a lot of lenders, if you go for other types of loans or a mortgage, they look at your debt ratio, how much you debt compared to what you earn, but they also look at your credit usage. And that’s what largely influences your FICO score. The more you can control this and open more lines, the better your credit will be.
ME: If doctors want to consolidate their debt, what questions should they ask potential lenders?
Panebianco: First of all, what kind of rate? Loans usually have a fixed or variable rate, so you want to see what that means to you and how it affects your payment. You want to see if they need personal guarantees. One of the big drawbacks of many loans is that you sign off some of your personal property. You also want to ask what is the repayment term? The longer the term of your loan, the higher the interest amount [in the long run], But [with a longer loan comes a smaller monthly payment], which helps you. The other question is, will this application or loan show up on my credit report? This is a very big question. Again, this is what other lenders are looking for. This affects your FICO score.
ME: What is the application process ??
Panebianco: This is a very important step. Doctors are busy, you already have a lot to deal with with COVID-19 in your practice and outside of the office. You want to make sure that it is something that is very easy to obtain. And then you really want to watch what the process is beyond that. How long will it take to process? Typically, traditional loans tend to take longer, and there are [small business] loans too, which have always taken longer. Some of the online lenders are much faster. But there are different requirements for everyone. You want to weigh each of these elements. Then there is the approval. How long can I get my funds? This is a big deal, especially if you are trying to buy new equipment. If you’re trying to acquire a practice or anything related to your business, speed is key. And finally, you want to understand that the lender knows who you are. You want someone who will take good care of you, who understands your business, who understands the challenges you face and how quickly you need capital.
ME: One of the things you mentioned was the fixed rate versus the variable rate. With interest rates so low, is it as big a decision as it was before?
Panebianco: It really depends. This will fluctuate depending on market conditions. With a fixed rate, you will always know what the interest charges will be. It’s more predictable and you can handle it. Adjustable rates tend to move and this can have a bigger impact on your payment; [the rate] can adjust and you may not be prepared for it.
ME: Are there some common mistakes doctors make with debts that end up costing them money?
Panebianco: The average debt of an American is around $ 20,000 between credit cards and personal loans. When you factor in installment auto loans and mortgages, the average American national debt is over $ 90,000. Often times when you dig into this debt you find that individuals have run out of their cards to the max, they don’t pay attention to the available credit. They can have loans from multiple lenders, switching from one lender to another with multiple loans for different uses. But they can only make minimum payments. It’s one of the things that we see a lot of people doing. They say, well, the payment on my statement was $ 50. But that’s the minimum payment due, and you’re not eating the interest, you’re hurting yourself in the long run. Credit card companies have to publish statements as to how long it will take to pay this off, and that’s a good, much longer term. [if you only pay the minimum each month]. So while it can be affordable, you can get into trouble very quickly. We also often find that people have lost track of what expenses they have to pay by what date, and they may not have everything in place for automatic payment. It can get you in trouble.
ME: A lot of doctors really have to save to be successful in medical school and residency, and then they walk out of residency, get that job, and they’re inundated with money. Do you see cases where they lose track because they have so much money now, maybe they are a little reckless?
Panebianco: I think you see this often as people’s incomes go up and their expenses go up. The monthly disposable income is there, and they may not be as disciplined as they used to be on a small budget. I think it’s a problem that when someone earns more money they tend to spend more. What we are seeing is that a lot of people look at the monthly payment and live by the monthly payment. I think this is quite common in the United States. It’s affordable, but they don’t look at the inner workings of their spending. So you can lengthen your loan payment, you’ll pay more interest, but it’s affordable right now. This is something that people should be aware of and they should do their own health check.
ME: Just because you can afford it doesn’t mean you have to ignore the rates and the inner workings of the loans you have?
Panebianco: Exactly. You want to watch everything. These lenders should spell this out for you. That’s what you see now if you’re going to take out a longer term loan – you want to see what the prepayment penalty is because you might not really care about the interest. It’s that monthly payment because you can pay it off in a year. Make sure to check if there are any prepayment penalties or skyrocketing payments if you are not on a fixed rate loan. These are all the things you need to educate yourself about and your lender should help you with them.
ME: Is it ever too late in a career to tackle debt issues?
Panebianco: You’re never too old for that. It only takes a few minutes to check it every month. If you create a process, it will be easier in the future. It’s going to be painful at first, but I think you’re never too old, you’re never too far in your career to go back and sit down and start the basics.