Should I Prepay My Practice Loans?
Dear Dr. Hayes,
I am a young female OD who opened cold in the Spring of 2008 in a major West Coast city. I am proud to say that, in spite of the recession, I am doing well.
I was profitable in 2008 with a collected gross revenue of $250,000. I am now on track to gross over $400,000 in 2009. I have a low-overhead practice and plan to net in the 35% range, hopefully around $150,000.
I took out a start-up loan in the amount of $95,000 at an interest rate of 8%. The payments are $2,000 per month and I have about five years left on the loan.
The terms of my loan allow me to prepay in full with no penalty, but the lender does not allow accelerated or double monthly payments.
Here is my question. I am anxious to get totally out of debt and have $110,000 in savings. Given that I am getting an 8% return on my savings, do you think it is wise to pay off the loan at that time or keep making payments?
I love private practice and want to do a good job of managing my finances.
Thank you so much for your assistance. I appreciate it.
Sincerely,
LC
Dear LC,
My compliments on having the courage to open cold in the big city and my congratulations on doing so well!
As for prepaying your practice loan, my opinion is that you should NOT deplete your $110,000 savings to pay off the $95,000 loan at this time. Here is my thinking:
Most financial experts advise young adults to maintain a cash cushion of at least six months income. The reason is, you just never know when you might have a major unexpected expense.
What if you had an unexpected illness or pregnancy that caused you to miss work? What if your office was damaged by fire or, in your area, an earthquake?
And, you never know when a great investment opportunity, in terms of real estate or buying another practice, may present itself.
Since you are doing so well in your practice and have no other debt, the $2,000 monthly payment should not be a strain. Also remember the interest you pay on business loans is totally tax deductible, so your effective rate is really lower than8%.
For all those reasons, I think you are much better off to keep paying on the loan and build your cash reserves.
I say keep saving, build your nest egg up to $200,000, and then pay off the loan when you have all your other financial obligations under control.
The challenge for most young adults starting out is having the discipline to accumulate funds and you've already done that. My advice is keep your nestegg in tact and use OPM (Other People's Money) to grow your practice.
Bravo for doing such a good job with your practice and your finances!
Regards,
Jerry Hayes, OD
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Disclaimer: The information and opinions contained on this site are for discussion purposes only and are NOT intended to serve as legal, accounting or investment advice. ©2009 Jerry Hayes, OD. Not to be reproduced without written permission of the author.
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Wow. Congratulations on how
Wow. Congratulations on how well your practice is doing.