When Should Doctors Use a Personal Loan?

Blogging for free eliminates most of the ethical dilemmas inherent in writing about financial products. When I started The White Coat Investor in 2011, I was not willing to do that. I knew that to keep me interested long enough to make a difference, I would need to be making some money, and it is impossible to make money without having any sort of conflict of interest.

As the years went by, the for-profit nature of WCI has allowed us to do a lot of cool things to make an even bigger difference—like hiring staff to help, paying columnists to provide additional perspective, giving out scholarships to students and awards to educators, and especially sending hundreds of thousands of dollars worth of books to students via our Champions program.

Some of the most challenging ethical dilemmas we have faced, however, involve deciding which companies to sell advertisements to and which companies with whom we partner. We want “the best,” but practical reality means it is “the best that is willing to buy an ad.”

We have faced similar ethical dilemmas regarding the category of advertiser or the type of product being advertised. You'll notice there aren't any casinos or tobacco companies advertising at WCI, for instance. OK, none have actually tried to advertise here. But we wouldn't sell them an ad even if they did.

However, we have had plenty of lenders who want to advertise with us. I'm not a huge fan of doctors being in debt, and we actually spend a great deal of time and effort trying to help doctors get out of debt. You can imagine the ethical dilemma involved in working with these companies. Yet, we have advertisers that offer mortgages, student loans, and even personal loans. Each of these types of debt has the potential to get WCIers into trouble. So, when offering these products, we try to make sure we're also offering sufficient educational information about how we think these products ought to be used. That includes tips like:

“Don't refinance your federal student loans if you're going for PSLF.” “Live like a resident.” “Don't borrow more than 2X your gross income in mortgage debt.” “Don't carry credit card balances”

. . . and more. Today's post is designed to provide educational content about personal loans.

What Is a Personal Loan?

A personal loan is a loan with no collateral that you can use for any purpose you like. Terms can vary, but terms are generally shorter than something like a mortgage or student loan and longer than something like a payday or title loan. Since there is no collateral, interest rates tend to be higher than what you would see for mortgages. However, they do tend to be lower than what you would get with a typical credit card and dramatically lower than a payday/title loan. If mortgage rates are 6%-7% and credit card rates are 15%-30%, you would expect the interest rate on a personal loan to be something like 8%-14%.

That's still a high interest rate, so paying it off should be a major priority in your financial plan. Obviously, if you have a better source of funds (cash, family, investments, or a lower interest rate loan) available, you should probably take advantage of that before seeking a personal loan.

More information here:

How Do Personal Loans Impact Credit Score?

What Do Doctors Use Personal Loans For?

There are many things for which a personal loan can be used. One of our partnering advertisers, Doc2Doc, lists these uses.

One of our long-time advertisers, Laurel Road, also offers personal loans to the WCI community. Laurel Road actually asks what you're planning to use it for, and it recently provided us with anonymized data on personal loans taken out by WCIers. Here's what you used your Laurel Road personal loans for (or at least what you told Laurel Road you were going to do with them).

As I look at that list, the first thing I ask myself is if I'm still OK with Laurel Road (and similar companies) advertising this product line here at The White Coat Investor. Let's talk about some of the uses we're seeing and the circumstances under which they could be justified.

Debt Consolidation

Having debt to consolidate usually means someone is coming out of a terrible financial situation. Maybe they're just becoming financially literate and repenting of their profligate spending. Or perhaps they were just in a really tough spot, and they had to use 29% credit cards to put food on the table. Well, why not refinance your 15%-30% loans into a 12% (or whatever) loan while you're cleaning up the mess? As long as you don't take that as permission to run up the credit cards again, that seems like a good use of a personal loan to me.

Other

I don't know what to make of the second-largest category. I suspect some of it is just people wanting a little anonymity. No problem with that. “Other” is also used for stuff that just wasn't on the survey's drop-down menu. Maybe it means paying for Grandpa's burial. Or an unexpected car repair while you're still building a real emergency fund. That doesn't seem so bad, does it? How about family planning (i.e. fertility treatments)? That's a big need in the WCI community, and the longer you wait, the less likely it is to work and the more it might cost. Not a terrible reason to borrow to do it now.

Or maybe it's for bottle service on a trip to Las Vegas. That doesn't seem like such a great use. I'm not a big fan of borrowing for weddings or honeymoons either. You can get married for like $100 at the county courthouse and go camping for a couple of days for the honeymoon. Otherwise, hit up your parents and save up some money. A wedding, like an undergraduate education, costs what you're willing to pay. I don't think it's a great idea for WCIers to borrow for either one of them.

Home Improvement

I'm not a big fan of this one unless it's a very short-term loan. If you're just borrowing money for a month or three or maybe even six, the interest rate just doesn't matter that much. Say you're an orthopedist making $60,000 a month who took out a $100,000, 10% personal loan for three months to pay for a new kitchen. It's going to cost you $2,500 in interest. No big deal. You make $60,000 a month. Spend it on whatever you like, and if that's doing the renovation now instead of saving up for it for three months, fine. (As long as you're putting 20% away for retirement and on track for your other financial goals.) But if you're going to drag this thing out for five years, why not just get a Home Equity Line of Credit (HELOC) or refinance the mortgage instead? You would probably get a better interest rate by offering your home as collateral.

Moving Expenses

I wasn't surprised to see this one on the list, especially moving expenses when going to residency in the first place. Technically, you're not supposed to take out a little extra student loan money to pay for your life between graduation in May and your first paycheck in August. That's technically fraud since you signed a note saying you would use the borrowed money only for education. But it's pretty commonly done. So, maybe the moving expense borrowers are actually the honest ones. But if the loan is small and short-term, I don't have a big problem with it.

Auto and Major Purchases

I would think most people could get a better rate on auto loans than personal loans, given the presence of collateral. But sometimes it's just a lot more convenient to do the personal loan, and if it is going to be short-term (which I hope all personal AND auto loans are), it's not a huge deal.

Business Loan

This might be the best reason on the list, but it must be a heck of a business opportunity if you can finance it at 8%-15% and have it still work out well. Hopefully, most of these are also short-term.

Vacation?

I was NOT happy to see this one on the list. If there is anything dumber than insuring your vacation, it's borrowing to pay for it. Please don't do that.

What Are the Specifics of These Loans?

Every loan and every loan company is different, and interest rates are always changing. Your credit history/score and income are going to affect the terms you receive as well, like any other loan (except federal student loans where you only need a pulse and an acceptance letter). But since Laurel Road was kind enough to share that data with us, I'll tell you a little more about its specific products.

As you can see, Laurel Road has special loans designed for students and residents. If you dive into the details, you can see a little more about these, particularly the “special repayment option during training.”

Fifteen thousand dollars seems like a reasonable cap. We like the rate discounts which add up to 0.45%. Please make sure you get both of them. I like the lack of fees and prepayment penalties because I definitely want these pre-paid. I'm trying to decide if I like the $25 per month payments. I mean, if you only pay $300 a year toward a $15,000, 10% loan, you're going backward. It'll never be paid off.

But I guess flexibility is nice, especially those first few months of residency. However, paying this off should be a financial priority during residency. The PSLF Cavalry isn't coming for this loan.

Seems to me that $45,000 is an awful lot to potentially borrow on a personal loan with an income of only $60,000-$70,000. Maybe it's OK if your spouse is an attending and it's only for a few months, but be careful there. Again, I like the discounts and lack of fees/penalties, but I have mixed feelings about the $25 per month payment. Please remember that personal loans should be SHORT-TERM loans and paying them off should be a major financial priority. Maybe you borrow $10,000, and make monthly payments as follows:

$25, $25, $25, $1,000, $1,500, $1,500, $1,500, $5,000.

That's way better than:

$25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25, $25,  $0, $0, $0, $0, $0, $0, $0, declare bankruptcy.

More information here:

How to Get a Personal Loan

The Bottom Line on Personal Loans

I would prefer to see most WCIers avoid taking out personal loans at all. If you absolutely need to take one out, get the best terms available (which we think our partners are providing) and pay it off rapidly. Note that we get paid for referring you to these partners, so thank you in advance for supporting the site. We don't get paid more if you adopt these loans and let them live in your basement for the next 20 years as opposed to paying them off in two months, though. So, please get rid of them as soon as you can.

Here are the affiliate links for our partners that offer personal loans. It doesn't take long to do a preliminary application (soft credit pulls only) with all five to see which one is going to offer you the best rate.

Laurel Road Splash Financial SoFi Credible Doc2Doc

What do you think? What have you used a personal loan for? What were the terms? How long did it take to pay it off? 

The post When Should Doctors Use a Personal Loan? appeared first on The White Coat Investor - Investing & Personal Finance for Doctors.