Doctors have unique financial situations at all different stages in their careers. For that reason, taking out a personal loan from time to time might sound appealing. For example, if you are resident and making only $50k a year but have medical school loan payments or need to finance a move or just pay rent, you may take out a residency relocation loan. Or, let's say you are already an attending physician making a decent salary but need a significant amount of capital because you want to open your own medical practice. You could take out a practice loan, or, depending on your situation, a personal loan designed for physicians might be more attractive.
The truth is a personal loan doesn't have to have a designated, pre-approved use. You may just be in need of cash to live your life. That is totally fine and exactly why these loans were created in the first place. Most personal loans are unsecured debt. This means you don’t need collateral to secure the loan which is different than a physician mortgage or auto loans. With those types of loans, the property you buy is backing up the loan in the event you default. The lenders will assess your ability to repay by requiring you have current income, decent credit and no major red flags in your background. That said, even if you do have a not-so-great financial picture, you can still get a physician personal loan, but with a higher interest rate.
Personal loans in America are rising in popularly, and not just amongst physicians. According to TransUnion, total balances on personal loans exceeded $100 billion for the first time in 2016. Credit cards for doctors are great, but personal loans tend to come with less punishing interest rates. And if you make your payments on time, the loan will actually improve your credit score over time. According to statistics obtained from LendingTree:
- 2013: Personal loan debt in America was $55.7 billion
- 2018: Personal loan debt in America grows to $125.4 billion
- Average loan amount: $10,575
- Average APR for those with good credit: 7%
- Average term length: 3 years
- Delinquency rate: 3%
The most popular reason, according to LendingTree, that Americans take out personal loans is to consolidate their debt. That is about 40% of the borrowers.
That said, the typical physician has a different use for a personal loan (sometimes) than the typical American. As mentioned, personal loans have several uses:
Maybe while you were in residency you lived on credit cards, then you took out a loan to buy a medical practice and then you refinanced your student loans and took out a home improvement loan to fix your garage. All of a sudden, you are knee-deep in monthly payments. Debt consolidation through a personal loan repays existing debts from the proceeds of your new loan. Instead of multiple monthly payments, you consolidate down to one. You can set up the loan term so that your new monthly payment is lower than your previously combined payments. If you have a fixed-rate loan, your monthly payment will stay the same throughout the loan term. Plus, assuming you avoid adding debt, you can point to the end of the loan term as the day you’ll be debt-free.
Doctors have medical emergencies, too. And just because they are doctors, doesn't mean healthcare in America is any cheaper. A personal loan is often used to pay off large medical bills that come with outrageous late fees. One advantage is that you can keep the medical debt out of the collections process. On the other hand, you should try to negotiate a payment plan with the provider before taking out a personal loan. In most cases, medical debt can be repaid in installments without interest.
One thing about doctors in America is they are in demand. There is a noteworthy lack of healthcare in rural areas so maybe a hospital in rural Kentucky made you an offer you can't refuse. But actually picking up your life and family and moving there is expensive. Renting a truck. Hiring movers. Paying deposits. Buying furniture and household items. The farther the move, the more you’ll shell out. A personal loan can help cover these costs.
Home repairs and improvements
Most people think of using home equity loans or lines of credit. But what do you do if your home needs a repair and you lack equity in your property? One option could be a personal loan. You can obtain a personal loan regardless of your home’s equity. Another advantage is that home equity loans use your property as collateral. Personal loans do not. If you fall behind on your debt, you won’t be at risk of losing your home if you used a personal loan.
Major auto repairs
You’re not ready to get rid of the car that needs a new transmission. A personal loan can help you pay the mechanic bill. That way you don’t have to pay for it using a high-interest credit card.
Unexpected life events happen to us all, even doctors. For these situations, personal loans can provide funds fairly quickly to minimize any financial perils that may result. However, an even better measure to take is to set up an emergency fund that you can fall back on when times get tough.
In addition to gaining quick cash, using personal loans can offer a number of advantages.
Lower Interest Rates
One of the main benefits of using a personal loan is replacing high-interest debt with a lower rate. In addition, you can get a fixed-rate personal loan. This means your interest rate won’t rise with prevailing rates. Credit card rates, on the other hand, routinely rise and fall based on the interest rate environment.
One. Single. Payment.
A personal loan can be a great tool to remove the chaos of having multiple payments. You can consolidate multiple higher-interest debts into one fixed monthly payment. If you have difficulty keeping up with your credit cards and store card bills, a personal loan can streamline your payments.
Improve Your Credit Score
Financial literacy among physicians is notoriously bad. However, as personal finance blogs creep up and social media helps spread useful education, the secret that physician personal loans can improve your credit score is no longer a secret. Here is how it works:
If you have a $10k limit on your credit card and have an $8k balance, your credit utilization rate is 80%. The higher the rate, the worse your credit. If you use a personal loan to pay off your credit card, then you will lower your credit utilization and improve your credit score.
A personal loan is an installment loan. That means you pay the same amount each month for a specified term. A structured payment plan can help you repay the loan back more quickly and overall help physicians financially plan for the future.
Another way personal loans help credit scores is by diversifying your credit. Your credit rating benefits from a mix of different kinds of debt, such as credit cards, student loans, and a mortgage, on your credit report. If your current debt consists only of credit cards, adding a personal loan can help you establish a better mix of debt.
There are times you should avoid a personal loan. In these situations, it may be best to seek other financing options or don’t borrow at all. These scenarios include:
You can't make the payments
There are plenty of budgeting methods for doctors and it's a good idea to review them all before taking out a personal loan. Make sure the loan payments will fit in your budget so that you don’t risk defaulting on the loan. You also want to avoid using a credit card to make up for budget shortfalls caused by taking out a personal loan.
You are about to buy a house
Getting a personal loan will raise your debt-to-income ratio. This, in turn, affects your credit score, which could affect the mortgage rate you receive. In addition, traditional mortgages limit your DTI to between 35 and 40 percent. That means if you earn $10,000 a month, your current debt can’t exceed $3,500 to $4,000 a month. Be careful not to take on a personal loan that will push your DTI above that mark if you’re thinking of buying a house. All that said, if you are a doctor then you should go for a physician mortgage instead of a conventional one.
People sometimes borrow money just because they can. Or, they may borrow more than they need because a lender will loan them a higher amount. If they need $10,000 to consolidate their credit card debt, they may borrow $15,000 to take a vacation also. It’s best to limit your personal loan amount to just what you need.
Want vs. Need
Many financial experts caution against using personal loans for unnecessary items. Examples include weddings, vacations, or a big-screen TV. Because of the ease of obtaining personal financing, it may encourage a borrower to go overboard. Plus, you want to strongly consider whether you want to pay for a one-week vacation or a two-hour wedding for the next four or five years.
There are plenty of reputable lenders for personal loans. Unfortunately, there are some who use practices that are frowned upon to win your business. Some examples to avoid include:
Advance loan fees
A lender may offer loans and terms that are too good to be true. In return, however, they insist you pay the first few months of payments to qualify. You should never have to make installment payments before you’ve secured a loan.
Many lenders will advertise guaranteed financing regardless of credit or lending history. Some will even tell you they don’t check credit scores before making loans. Others will tell you they can make loans if you’ve filed for bankruptcy. In exchange, these lenders likely assess heavy fees and/or high-interest rates. In addition, they may want several payments upfront. Legitimate lenders never guarantee or say that you are likely to get a loan before you apply. They evaluate creditworthiness and confirm the information in an application before they grant firm offers of credit to anyone.
Some fraudulent lenders offer personal loans, but insist you also buy “loan insurance.” This is to cover the loan in case you default. However, most personal loans are unsecured debt. No reputable lender would require insurance. If a secured personal loan is needed, you would put up collateral instead.
A common scam is for a lender to approve you for a loan, then demand payment of upfront fees before releasing the funds. Legitimate lenders may charge fees. But they disclose them clearly and prominently. They also take fees from the amount you borrow. And fees usually are paid to the lender or broker after the loan is approved. Make sure you understand all the fees associated with the loan. This will enable you to compare lenders when shopping for a personal loan.
This is interest that is stacked in a way so you pay the bulk of it near the beginning of the loan term. Before you take out a personal loan, know how interest is accrued and how it will impact the total costs of your loan.
Some lenders will assess a penalty if you pay off the full balance of the loan before the end of the term. For example, if your original loan term was 48 months and you repaid the loan in 36 months, the lender could charge a penalty. Prepayment penalties should be communicated before you sign for the loan. You should avoid any lender that charges prepayment penalties.
Large origination fees
Some lenders charge an origination fee. This is a fee to originate your personal loan application. Those that do charge this fee make it 1 to 2 percent of the loan amount. Fees higher than that should be avoided. Some may charge as much as 8 percent. On the flip side, many personal loan companies do not charge origination fees.
In addition to the aforementioned lender practices, make sure you do not fall victim to any of these common mistakes we see first-time borrowers make.
Not checking your credit score
It’s best to know where your credit stands before you apply. That way you can know what kind of offer to expect. In addition, knowing your credit score helps you avoid wasting time applying for loans you can’t qualify for.
Failing to shop around
Taking the first loan offer that comes your way can make your loan more expensive. Because rates vary by lender, borrowers who don’t shop around may leave money on the table. Also, keep in mind that the lowest rate isn’t automatically the best deal. There are also fees and other loan terms to consider.
Not getting pre-qualified
With an affirmative pre-qualification, you can know that your chances for loan approval are good. Plus, the pre-qualification process will not affect your credit. Your pre-qualification will also give you a preview of the loan rate and terms you can expect. This will make it easier to compare offers.
Only focusing on the monthly payment
Borrowers often fixate on the loan’s monthly payment because they want to know they can afford it. While that’s important, you should also review the loan’s APR. There are also fees to consider, such as origination fees, late fees and prepayment penalties. It’s best to know what these fees are upfront. That way you don’t make a mistake that costs you money later.
Not reading the contract
Take time to read the terms and conditions of the contract. Otherwise, you may be surprised later by provisions you didn’t realize were contained in the document. If you have questions, don’t sign until you understand everything contained in the contract.
Making late payments or not repaying the loan
Late payments negatively impact your credit score. By not repaying the loan, the lender will send it to collections. You could also be taken to court. If it’s a secured loan, you may lose your collateral.
Not asking how interest is calculated
Lenders calculate interest differently. It’s important to know before signing how the interest on your loan will be calculated. For example, some lenders use a simple interest method. This means the amount increases based on the amount your borrow, the interest rate, and the length of the loan. If you borrow $1,000 at 5 percent, you would pay $50 in interest each year. Other lenders use compounding interest. This is when interest continues to accrue on top of the existing interest as you pay down the balance. Lenders also differ on how often they calculate compounded interest. It could be daily, monthly, semiannually, or annually. Interest that compounds daily will cost the most over time. Annual compounding will cost the least.
To qualify for the special financing options that only medical professionals can get, you obviously need to be working in the medical industry and have proof of employment. After the initial qualifications are met, however, lenders that specialize in physician financing will review your application like any other borrower and review the following:
- Credit score (the higher the better)
- Income history (evidence you can repay the loan)
- Debt-to-income ratio (the higher this is, the higher the interest rate)
When it comes time to borrow, here are the most common types of personal loans you may want to evaluate.
Most personal loans are unsecured. This means there is no collateral securing the loan. You don’t have to put up your house, car or other valuable. Other types of unsecured debt include student loans and credit cards. Without collateral, the lender takes on more risk. If you are unable to repay your loan, the lender has no assets backing the repayment of the loan. Therefore, unsecured loans typically carry a higher interest rate than secured loans.
Secured loans are backed by an asset. The most common secured loans are mortgages and auto loans. The house or car you borrow to buy secures the loan. If you default on a mortgage or car loan, the lender can legally seize the asset securing the loan. An asset that secures a loan is known as collateral. That said, almost all physician personal loans are unsecured loans which will not be backed by any sort of asset.
Fixed-rate loans have an interest rate that does not change. Whether your loan is for two years or 20, the interest rate remains the same. That means your minimum payment remains unchanged. You lock in the interest rate once you’re approved and financed.
Variable-rate loans have an interest rate that fluctuates over time. The rate on your loan will move in line with prevailing interest rates. As the rate changes, so does your monthly payment. Variable loans usually have lower starting interest rates than fixed-rate loans. But over time, the rate paid on a variable loan can exceed that of a similar fixed-rate loan.
If you have lackluster credit, you may need a cosigner for your personal loan. A cosigner is like a backup borrower. If the main borrower can’t make payments, the cosigner becomes responsible for repayment. Enlisting a cosigner is another way a lender can assume less risk on a personal loan. The typical cosigner is a family member. For example, parents often cosign for their children’s first loans. However, anybody who is willing and has adequate credit can cosign for a loan.
Personal line of credit
A personal line of credit differs from a personal loan. Instead of receiving a lump sum loan, a line of credit gives you access to a set amount of money from which you can borrow any time. You only pay interest on what you borrow. For example, if you have a $10k line of credit and borrow $5k, you only pay interest on the $5k.
There are two parts to a line of credit. The first is the draw period. This begins once you qualify for the credit line. This is the timeframe during which you can access funds from the credit line. The lender will determine how long the draw period will last. Interest will begin to accrue once you borrow from the credit line. Once the draw period ends, you will enter the repayment period. The lender will give you a set amount of time to pay off the borrowed funds.
If you can’t qualify for a traditional personal loan, another option may be peer-to-peer lending through special peer-to-peer websites such as Prosper or LendingClub. Essentially, instead of borrowing money from a financial institution, peer-to-peer lending websites allow you to borrow at favorable terms from other individuals like you. The main advantage of peer-to-peer lending is accessible financing at reasonable interest rates. That can also be a disadvantage, as it gives easy credit access to borrowers who may have trouble with debt.
If you have good or excellent credit, you can get a physician personal loan between 7-11% APR. That is far superior than the average credit card APR. However, the worse your credit, the higher the interest rate. According to LendingTree, the average APR in 2018 for personal loans (not just physician personal loans) was 33%. Another factor that determines your interest rate is the loan term. One provider of personal loans, a company called Earnest, lists the following interest rates on a hypothetical $10,000 loan:
- 7% to 14.24% on a 3-year term
- 7.49% to 16.24% on a 4-year term
- 9.49% to 18.24% on a 5-year term
To see how a higher interest rate impacts the monthly payments, consider this scenario. Let's say you want to borrow $7,500 and you plan to repay the loan over five years.
- $152/ month at an 8% interest rate. Over 5 years, you'll pay $1,624 in interest
- $167/ month at a 12% interest rate. Over 5 years, you'll pay $2,510 in interest
- $178/ month at 15% interest rate. Over 5 years, you'll pay $3,205 in interest
The more you borrow, the more the interest rate matters and will affect your monthly payments.
At LeverageRx, we help doctors cut through the noise to make smart, swift financial decisions. That means giving you the resources you need to effectively comparison shop.
Panacea Financial is banking build for doctors, by doctors. They offer physician personal loans and state on their website they can provide funding in less than 24 hours, no co-signer needed, no hidden fees and 100% digital. Visit Panacea Financial to learn more.
Hippo Lending doesn't necessarily offer physician personal loans, but instead they provide physicians with loans designed to be used in their medical office or place of employment. This is sometimes a blurry line so we opted to include them in the list. Click here to learn more about Hippo Lending Financing Solutions.
TowneBank offers specialized private banking services for the healthcare industry. Similar to Hippo Lending, TowneBank places an emphasis on the physician having his own practice in order to receive financing, but these lines can be blurry. They offer doctors lines of credit, equipment financing and construction loans. Visit TowneBank's website here to learn more.
If you live in Florida, Georgia or Alabama, then Ameris Bank offers doctors an exclusive line of credit. The minimum amount you can borrow is $10k and the maximum is $150k. There are no origination fees and the principal can be repaid at any time. Visit Ameris Bank's website to learn more about their Doctor Line of Credit.
PNC Bank has a financing product called the Medical Residency Loan. If you are a current resident, or can remember your residency days, money is usually tight and a cash cushion can easily take away the stress. PNC's residency loans come with zero origination or application fees, and you can choose a fixed or variable rate. Click here to learn more on PNC's website.
Bankers Healthcare Group (BHG)
BHG is fully dedicated to the financing needs of medical professionals. The company is well known for its practice financing product (that's if you want to acquire or open your own medical practice), as well personal loans. A personal loan from BHG can be used to renovate a home, buy a car or go on vacation. The company prides itself of being available 24/7 to accommodate the hectic schedules doctors often carry. Learn more about BHG here.
Laurel Road has all the financing needs a doctor may need. With flexible terms, Laurel Road offers personal loans to meet your needs. Borrow up to $80,000 with a fixed interest rate. According to their website, you can check your rate in little as five minutes. So what are you waiting for? Visit Laurel Road's personal loans page here.
As the name suggests, Doc2Doc lending is committed to solving the financial needs of doctors in America. That said, if you took a loan out with Doc2Doc Lending, it would actually be serviced by a the Bank of Lake Mills. No co-signer is needed, you can get a loan with a fixed interest rate and according to their website, be approved and funded within days. Visit Doc2Doc Lending here.
A division of SunTrust Bank, LightStream offers low, fixed rates and flexible terms. A LightStream loan for $5,000 to $100,000 can be quickly delivered directly to a borrower’s bank account. LightStream advertises that it will beat an interest rate (APR) presented by any other lender by .10 percentage points, provided the other lender’s rate meets certain terms and conditions. There are no fees or charges, nor penalties for early payment.
By now, we hope to have answered most of your questions regarding personal loans for physicians. However, you may still have one or more lingering questions you're not quite sure about.
How long will it take to get the loan funds?
A personal loan could be funded in less than a week, depending on the lender. Some lenders will require more documentation, ask questions and take longer, while some are digital-forward and you could receive the loan in just 5-7 business days.
Does applying for a personal loan affect your credit?
The application process when taking out a personal loan should not affect your credit report. Lenders do a soft credit check, which is simply a data request. If and when you sign for a loan, the lender will conduct a “hard inquiry” to verify the information in your application. The hard inquiry will be shown on your credit report, however that does not mean it will affect your credit score. What could affect your credit score, however, is too many hard inquiries, so be aware.
Why do personal loans carry higher interest rates than other types of loans?
Most personal loans are unsecured loans. This means there is no collateral securing the loan. You don’t have to put up your house, car or other valuable. Without collateral, the lender takes on more risk. If you are unable to repay your loan, the lender has no assets backing the repayment of the loan. Therefore, unsecured loans typically carry a higher interest rate than secured loans. On the other hand, mortgages and auto loans are secured by the property you are financing. That means less risk for the lender. With less risk comes lower interest rates.
Should I choose a fixed rate or variable loan rate?
There’s no right or wrong answer. If you like having the same monthly payment, you should choose a fixed-rate loan. Also, the longer the loan term, the more you benefit from a fixed rate because it eliminates the risk of interest rate changes over time. Fixed rates are also advisable if current prevailing interest rates are low and subject to increase in the near term. A variable rate, on the other hand, can save you in the first months of your loan. That’s because variable loans start with a rate lower than a fixed-rate loan. If your repayment term will be short, you might benefit more from a variable rate loan.
How long of a repayment term should I choose?
Typical repayment terms for personal loans range from 12 months to 84 months. Some have longer terms available. Financial advisors recommend paying off the loan as quickly as possible. That’s because the longer you hold onto the loan, the more overall interest you will pay. Not only is your interest rate higher, but it compounds over a longer period if you choose a longer repayment term.
Are there limits on what I can use a personal loan for?
That may depend on the lender. For example, SoFi states that its loans are solely for personal, family, or household purposes. They are not permitted to be used for real estate, business purposes, investments, purchases of securities, post-secondary education, and short-term bridge financing. Other lenders have no limits on what personal loans can be used for.
What happens if I’m late on a payment or default on the loan?
If you have a secured personal loan, the lender may take ownership of the property you put up for collateral. Even if the loan is unsecured, there will be consequences. The lender will likely assign a collection agency to obtain payment. Defaulting will also hurt your credit score. That will make it more challenging to obtain financing in the future.