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Advantages and Disadvantages
By Staff Reporters
The main advantage of debt consolidation is that it allows a doctor to make one payment instead of many, and this helps avoid late fees for missed payments. The doctor may save time by having to make only one payment per month instead of many.
Other Advantages
Another advantage is that debt consolidation promotes self-discipline by transferring credit card debt (and other lines of credit) that does not require mandatory principal payments into a fixed-term loan – with mandatory payments that include both principal and interest. This is a useful tool for doctors who may find it difficult to make more than the minimum payments on their loans because they spend too much. It should be obvious that budgeting should go hand-in-hand with this process, because if the doctor continues to spend at the former level, yet now has a mandatory payment, the result can be financially devastating.
A final advantage to debt consolidation is it may result in a lower overall interest rate. This is, of course, conditional on the lender providing the consolidation.
Disadvantages
One disadvantage of debt consolidation is that it can lock a doctor into mandatory payments. Depending on the situation, this can be either a blessing or a curse. It becomes a curse when the fixed payments are so high that he/she can no longer make the full debt payments each month. Depending on the lender, and the terms of the consolidation loan, this could result in the loan being called. The effects of this are obviously detrimental to the doctor.
Other Disadvantages
A second disadvantage is that the doctor loses flexibility when he or she takes on a fixed payment that is larger than the combination of all smaller minimum payments. The fixed-payment schedule becomes detrimental when h/she has an unexpected reduction in income. The doctor without a fixed-payment schedule can increase payments to many small individual loans, and if income reduction occurs, drop the payments back down to the lower level. Then; when normal levels of income return, the higher payments can be resumed.
Assessment
Making larger payments requires discipline; because a lack of same was likely causative of the debt in the first place.
Conclusion
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Filed under: Financial Planning, Funding Basics, Investing, Risk Management | Tagged: cash management, certified financial planner, certified medical planner, CFP, CMP, david marcinko, debt consolidation, doctors, financial planners, Financial Planning, hope hetico, loans, medical payments, physician debtors, physician investors, physicians |
The Leading Business Education Network for Doctors, Financial Advisors and Health Industry Consultants 
Debt consolidation can be useful in certain circumstances, but other options are often more appropriate.
For example, I recommend prioritizing debts based upon the size, the interest rate, and the tax-favorable status of some loans. The minimum payment should be made on each debt, with extra payments going to the loan with the highest rate and/or non-deductible interest. As the first debt is paid off, the amount of that payment can be applied to the debt with the next highest priority, and so forth.
Mortgage interest is deductible, so this should usually be paid off last. The interest on a home equity line of credit (HELOC) is also deductible, so this tool can be used to consolidate higher interest non-deductible loans.
I also remind physicians that it is OK to borrow money and pay it off over the useful life of the item that is being purchased. A house is obviously one example that fits this category. Another example is education loans. Many graduating medical students feel overwhelmed by their student loans, often totaling $200,000 or more. It is not required to pay off student loans before purchasing a home, buying a car, or even saving for retirement. The medical education will be used over a lifetime, so it is acceptable to spread out the repayment of these loans over a long period of time.
Brian J. Knabe MD CMP™ FAAFP
Savant Capital Management, Inc®.
190 Buckley Drive
Rockford, IL 61107
Tel 815-227-0300
Fax 815-226-2195
bknabe@savantcapital.com
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In other words, it is not a good idea to buy too many depreciating assets that one can’t afford -OR- to use credit for purchase with a pay-back period longer than their useful life [depreciation].
Better to purchase appreciating assets like a home, business or education.
Remember however, school loans are one of the few debts that may not be discharged in a bankruptcy.
As for practicing medicine for an entire career …?
Hope Hetico RN, MHA
[Managing Editor]
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